Collaboration with Treasury as Key to Improving Working Capital

# Cash and Working Capital

# Treasury Management System (TMS)

Breaking down silos between treasury, AP and procurement to optimize invoice processing and strategic liquidity management.

With interest rates likely to remain higher for longer , opportunistic treasury teams want to invest excess cash where it can earn attractive yields. One obstacle standing in the way at some companies stems from differing priorities between accounts payable (AP), which often aims to pay invoices as soon as possible, and treasury, which has a more strategic view of liquidity.

At a recent session of NeuGroup for Payments Strategy sponsored by Citi, treasury team members shared how they are thinking more strategically about the procure-to-pay (P2P) cycle by collaborating with AP and procurement, which negotiates payment terms.

The session included discussion of tools offered by Coupa, a business spend management platform whose offerings include a TMS and a solution called Coupa Pay that fosters open lines of communication between the three pillars of the P2P process.

Coupa vice president Tamir Shafer discussed the added importance in times of economic uncertainty of invoice processing that balances a company’s liquidity situation, plus the yield or discounts that can be generated based on the method of payment, as well as the timing of that payment. “The higher that interest rates are, the more important a program that takes all these pieces into account becomes as more potential yield is in play,” Mr. Shafer said.

Efficiency vs. strategy. In the session, one member said her company used to pay its invoices within about a week of receiving them, regardless of the payment terms. But interest rate hikes have put a premium on cash, forcing her to rethink strategy and make changes. “I said, ‘Let’s get working capital [operating] as organically as we can,’ so we created a playbook,” she said.

Under treasury’s guidance, the procurement team reached out to suppliers and renegotiated payment terms that are now followed. “We started negotiations at 120 days, then landed at 90. You’d be surprised how many companies are okay with 90-day payment terms,” she said. There’s also an option now to pay early at a discount—if the price is right.

Another member is attempting a similar rethink of how payments are processed, but is encountering difficulties due to AP’s different priorities. “Our AP team wants to be very efficient, so as soon as an invoice comes in, they process,” he said. “And that’s the exact opposite of what treasury wants to do: hold funds until the agreed time and put the cash to work.”

“If treasury is short cash, and AP is paying on day 12, instead of day 30 for example, then the process is broken, especially if treasury needs to go borrow money at a rate higher than what cash sitting in a bank account is earning,” Mr. Shafer said. “We have a vision of treasury and AP working together to make smarter decisions to ultimately improve working capital.”

A portal to collaboration. The problem, Mr. Shafer said, is that AP often isn’t aware of the lost opportunity to invest short-term cash when paying even a few days or weeks early. “That decision can only be made with treasury input,” he said. “If AP can help treasury make smarter decisions, that ultimately improves working capital.”

Coupa Pay works by consolidating all three pillars of the P2P process into a single online portal. Procurement can use the portal to interact with and purchase goods and services from suppliers, similar to using an e-commerce platform like Amazon; then AP can verify and approve the invoice. All payments are reconciled with bank statements automatically, so treasury immediately can see payments made. The portal also reflects any early payment discounts negotiated by procurement.

Coupa’s TMS includes a treasury cash management worksheet that gives AP more visibility into the company’s liquidity picture. By consolidating all payment information in a single place, Mr. Shafer said treasury can help AP make smarter decisions on when—and when not—to hold on to cash.

“Is AP looking at payment terms, where they are either paying in the early payment window, or are they holding the invoice until it’s due? That decision can only be made effectively if treasury is advising AP of where they are from a liquidity perspective,” Mr. Shafer said.

One member said Coupa Pay could fit well into her treasury team’s toolbox, aiding the company’s ability to be agile and adapt to market conditions. “The key is having different levers you can pull,” she said.

To review, here’s an overview of how Coupa says users of its products can improve working capital management:

“As AP related invoices are approved for payment, treasury sees those as a liquidity reduction, based on payment date, before the payments are actually made. This minimizes the need for treasury to manually input AP related payments in the treasury cash management worksheet (which otherwise could lead to manual input errors).

“If the sum of payment amounts are material, treasury could push back on AP and ask, ‘What’s going on here? We don’t have liquidity, so could we delay these payments?’ Or conversely, ‘Hey AP, did you know we have a lot of liquidity? Tell me about these invoices you just approved; were there early pay discount options, and if there were, why didn’t we leverage it here?’

“AP has visibility into the treasury cash management worksheet and forecast, and makes decisions about when to pay invoices given their access to the information, provided they worked with treasury to understand how to read the treasury cash management worksheet.”