One common pitfall for growing businesses is a lack of focus on financials. Marketing strategies and product development are undoubtedly exciting. Still, more often than not, it’s the diligent work of finance and accounting teams that keeps the business on track and moving full steam ahead.
If you’ve gotten by so far without financial forecasting, you may ask, “What’s the worst that can happen?”
The answer is “a lot” — and potentially at the worst moment. Absent or incomplete financial statements and forecasting can cause cash flow disruptions, inventory shortfalls, slow disaster recovery, reduced valuations, and problems obtaining credit.
Solid forecasting doesn’t have to be elaborate, but it should be consistent, comprehensive, and data-driven. Today, we’re covering some basics of financial forecasting and budgeting and sharing ways to improve your financial reporting.
With the right approach, you can move toward stronger financial positions and smoother operations through the inevitable peaks and valleys of running a business.
By the end of this article, you’ll know:
- What financial forecasting is and how it works
- The benefits of strong, consistent forecasting and budgeting
- How technology can boost financial forecasting.
First, let’s define forecasting and budgeting a little better.
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What is financial forecasting?
Financial forecasting is the process of using past financial data and current market trends to make educated assumptions for future periods. It is an important part of the business planning process and helps inform decision-making.
Effective forecasting relies on pairing quantitative insight with creative evaluation. Taking what you know and what you believe could happen near term, you can plan for what comes next.
Forecasting factors in expected events such as predictable economic changes or business expansions. It also attempts to establish contingency plans for unforeseen events such as stock market corrections, natural disasters, or long- or short-term business disruptions.
While forecasting cannot predict or avoid every pitfall — for instance, a global pandemic — it can ease the impact of outlier events and create opportunities for growth during advantageous periods.
Forecasting vs. budgeting
There are different financial forecasting models, each with distinct features and potential benefits. (It’s important to note that what many people call forecasting is actually budgeting.)
Every business is unique and will benefit from different types of forecasting models. In general, businesses operate using either:
- A traditional, static budget that forecasts expected revenue and expenses in a single time period — typically 12 months. In this approach, the projected revenue and expenses are amended over the current period, but the time horizon remains fixed. Amendments during the forecast period happen in smaller increments as your approach period end. This forecasting process is sometimes called forecasting “to the wall.”
- Rolling forecasts take a dynamic approach to financial planning. Instead of making budget allocations and setting goals once per year, forecasting is conducted over shorter periods (often quarterly) and reviewed during each period for potential adjustments. Planning is continually added to the end of the forecast horizon. This dynamic approach to forecasting allows companies to engage in a less-intensive yet consistent forecasting and budgeting process. It is especially helpful for handling higher-variability scenarios such as fluctuating inventory and seasonal cash flow.
Why is financial forecasting important?
Forecasting is the basis of every financial decision your company will make in a given time period. Strong financial forecasting practices tend to lead to better financial outcomes, more stable cash flow, and better access to the credit and investment that can help your business grow.
With a forecast in place, department heads can more effectively plan spending for their teams. Procurement and supply chain teams can plan capacity, manufacturing, and distribution. Sales and marketing professionals can develop metrics and reasonable sales targets based on the information analysis
Forecasting also serves as an important barometer for the overall health of your financial organization. As the fiscal year progresses, having well-documented forecasting can illustrate the effectiveness of current revenue-generating strategies, contextualize current performance, evaluate the market’s effect on your financials, and help identify and correct areas of misalignment.
Forecasting serves your business decisions by:
- Providing the basis for budgeting: As we said before, forecasting and budgeting are often used interchangeably. But in reality, they are two separate processes with different goals. Forecasting is the first step of overall financial planning. It considers known data and uses that to predict and influence future, unknown events.
- Creating necessary accountability: Having a documented plan also creates benchmarks for evaluating the progress toward your financial goals. As Peter Drucker famously pointed out, “What gets measured, gets managed." Successful spend management is one of the most important ways to ensure stable financial performance over time.
- Informing strategic decisions: With access to data and a well-reasoned future plan, stakeholders can make better decisions about the strategies and investments they make. Forecasting is the way to ensure that decisions are made based on accurate historical data and properly modeled future potential.
- Improving risk evaluations: Part of financial forecasting includes finding ways to mitigate unforeseen circumstances and create contingency plans for outlier scenarios. While you can never fully mitigate risk, imaginative scenario-building can reduce liability and improve recovery from unforeseen financial events.
- Facilitating planned, consistent growth: Successful growth shouldn’t be left to chance. Forecasting models grounded in solid data and assumptions can offer insights to create cost-cutting and growth opportunities. This can help you optimize spending, so more of your dollars go into revenue-generating activities.
Basic elements of financial reporting
The basis of your financial forecasting and reporting efforts will come from the three financial statements: the Balance Sheet, the Income statement, and the Cash Flow statement. These pro forma documents interconnect to reveal a holistic view of your company’s financial life.
- Income statement: Shows business performance across periods. The Income statement reflects vital signs like revenue, cost of goods sold (COGS), gross profit, expenses, pre-tax earnings, and net earnings.
- Balance Sheet: This is a report of the assets, liabilities, and equity over the preceding forecasting period. It is a point-in-time financial snapshot of the company.
- Cash Flow Statement: This shows the cash movements in your business. The purpose of this statement is to show the net change (increase or decrease) in cash balance over each period.
Five areas to review in financial modeling
When constructing any type of financial forecast, there are certain factors you’ll want to include in your reporting. Some, like past financial data, are concrete and easily contextualized. Others rely on advanced expertise to successfully identify and model outcomes.
Five of the most important factors in a forecasting exercise are:
- Historical data: Past financial performance is the cornerstone of forecasting. Examining your financials through previous forecasting periods will surface growth opportunities. This data is your most accurate starting point for making future projections.
- Forward-looking projections: Depending on your business and reporting method, your time horizon may vary from a year to two years. These projections should attempt to predict future revenue goals, new business opportunities, and other positive impacts.
- Expense and cash flow forecasting: Your forecast should attempt to evaluate expected expenses based on current company objectives, adjusted for consequences like inflation and increased goods and services costs. The better your procurement data, the more accurately you can forecast these expenses.
- Best/worst-case scenario planning: Financial modeling is not just about statistical analysis, but creative thinking. Therefore, thorough forecasting should explore different scenarios and outlier events. This includes adverse events — such as fires, location closures, cyber attacks, and natural disasters — and positive events such as higher-than-expected revenue, investment returns, etc.
- Risk analysis: Part of your contingency planning should consider liability caused by internal and external forces. While contingency planning for outside risk sources is essential, it’s also necessary to plan for internal risk factors such as employee malfeasance, lawsuits, and crisis events.
How technology improves financial forecasting and budgeting
Understanding the impact your variable costs have on expected revenue is the best step in creating more accurate forecasts for your company.
The right software can make forecasting easier by helping you visualize expenses over time. This makes it easy to see where you’re spending your money, in order to predict future spending and unforeseen circumstances.
- Procurement often represents the lion’s share of company expenses. Using an automated procurement tool can help organizations to find cost-savings opportunities within their current purchasing process. By centralizing your data and viewing results in real-time, you will gain granular spend visibility and context for expenses. This level of detail makes projecting future expenses easier.
- These technology tools also help users streamline vendor and supply choices to reduce spending. Using curation in your purchasing saves money in the short term while stabilizing monthly invoices and creating a more consistent view of expenditures.
- Processing invoices and payments can be time-consuming. By using a tool with Integrated payments systems, stakeholders can get what they need, and accounting can buy and pay for it faster. Using procurement software, users can automate invoicing to avoid penalties and realize early payment discounts. Improving your budget efficiency leaves more room in the budget for revenue-generating activities and strategies.
Using a procurement tool like Order.co, you can harness the power of data you already produce every day. Doing so can significantly improve the accuracy and effectiveness of your financial forecasting.
If your organization is ready to improve financial forecasting through better procurement management practices, schedule a demo of Order.co.
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Are manual tasks, decentralized data, and poorly documented policies bogging down your financial operations? If so, it’s time to stop relying on short-term fixes such as increasing headcount, and start implementing automation in your Finance function.
80% of CFOs report accelerating their investment in digital finance functionality for 2022. These numbers exceed the investment in other areas like talent, fixed assets (real estate and equipment), and supply chain. While migrating to a platform is a significant project and investment, it’s the most efficient and scalable long-term solution. Human teams, no matter how large or well-trained, can’t beat technology for optimizing processes.
In this article, you’ll learn how to improve your operational efficiency and save money by:
- Streamlining your supplier list for better leverage
- Establishing a formal purchasing process to improve productivity
- Building a cross-functional purchasing policy
- Automating AP to save time and money
- Integrating your systems into a single solution
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Where to start optimizing financial operations
If your accounting and finance processes aren’t yet running on automated platforms, there are still ways to build in efficiency and prepare for automation. Implementing a few small process improvements will have immediate upside in terms of efficiency, and pave the way for easier integration of platforms and automated workflows.
Let’s review the top five methods of increasing efficiency in your current Finance and Procurement functions:
1. Use strategic sourcing to improve savings
Streamlining your vendor list and strengthening supplier relationships is one of the first and easiest ways to improve financial efficiency. While strategic sourcing requires some work to collect your supplier data and benchmark pricing, you can start the process with only a spreadsheet and some help from the purchasers in each department or location.
Embracing strategic sourcing has many benefits, including:
- Cost savings: By relying on one supplier for a specific category or service, you can take advantage of volume discounts across locations, helping realize significant cost savings.
- Improves spend management: Streamlining your vendor list significantly reduces the number of invoices you process by consolidating your purchases across locations. Fewer invoices mean faster processing and opportunities to improve spend management.
- Consistency: Consolidation makes it easier to evaluate contracts for high-volume goods and services. By using one supplier to service all your locations, there’s no need to go back to the drawing board. No matter how many locations you service or how quickly you expand, the purchasing process will remain the same.
2. Standardize your procurement workflows
Start your stakeholders on the right foot by creating a well-documented, repeatable purchasing and approval process. There are a few benefits to codifying your purchasing process that include:
- Faster process: A standardized workflow for purchasing makes the requisition process faster and cleaner for your stakeholders.
- Easier financial reporting: Standardizing your purchasing creates a paper trail for audits and financial reporting and captures important data for future spend analysis.
- Improves internal processes: Approval workflows help stakeholders route approvals to the correct decision-maker. For instance, clear rules let them know when to include the Financial Operations Manager or Chief Financial Officer in high-value contract approvals.
- Creates transparency: It reduces the back-and-forth of manual or email-based approvals and builds transparency into the process. Stakeholders will know exactly what steps they must perform to get their needs met and have reasonable expectations of the timeline.
3. Establish purchasing prerequisites
Identifying departmental prerequisites lets stakeholders know the conditions they must meet for capital expenditures. For example, if your Finance department has certain requirements for contracts, such as avoiding single-year discounts or bundled services. Outlining your prerequisites avoids friction and wasted time during the approval process. This is especially true when negotiating a contract with a non-preferred or new supplier.
By setting expectations in advance, you won’t be caught heading back to the drawing board halfway through a negotiation, potentially saving hours of time for you, your sales rep, and your approvals team. Establishing these internal policies in advance also reduces risks and liabilities for your organization. It creates guardrails for finance and legal reviews and ensures everyone adheres to the practices that successfully reduce risk.
4. Automate your AP process
On average, companies spend about 1% of revenue on their Finance function, with top performers (as defined by APQC’s Open Standards Benchmarking database) coming in at just over .5%. For bottom performers, that number climbs as high as 1.6%. The difference between top and bottom is automation.
When it comes to reducing waste spending, realizing cost savings, and improving productivity, there’s no better place to start automating than your accounts payable and accounts receivable functions. Moving to a touchless process has some excellent short-term impacts on your business, such as:
- Speeds up invoice processing - Automated systems capture, code, and pay thousands of invoices per day, where full-time AP clerks typically average five processed invoices per hour.
- Reduces errors and fees - The reported average exception rate for manual invoicing is 13%. Even high-performing departments average 4%. Automating eliminates these exceptions and saves thousands in late fees annually.
- Increases early payment discounts - On the other side of the coin, moving to integrated payments and financial transactions speeds up the process. It helps companies realize more cost savings from suppliers.
5. Integrate your accounting and financial operations systems
Data silos between accounting and the larger finance organization create problems and reduce visibility. When the accounting and larger ERP platforms don’t integrate, you’re creating redundant work and opening the door to discrepancies.
Integrating your accounting and finance platforms creates:
- Cleaner data: Creates parity between the data in all your financial systems.
- More visibility: Gives the finance operations team a full view of the numbers, in turn improving financial planning and forecasting.
- Granular control: Helps finance get a handle on expenditures by location, team, department, and supplier to identify areas for improvement.
- Better record-keeping: Improves the integrity of your financial records, quarterly/annual statements.
- Accurate accounting: Supports GAAP accounting principles and audit preparation.
Moving to an end-to-end procurement solution
While any one of the above tips can improve your financial operations and efficiency, implementing them all as part of a fully-featured procurement platform like Order.co helps the finance and procurement teams work together and revolutionize their practices.
A procure-to-pay solution works by integrating your requisitions, invoicing, reconciliation, and payment processes into a single, automated system. These systems leverage AI and machine learning so your teams can get away from manual tasks. Automation removes many of the logjams and inefficiencies of manual operations and scales in step with business growth.
A procurement platform offers the finance team:
- Consolidated invoicing and payments that avoid fees and promote savings.
- Lower costs for every aspect of the procure-to-pay lifecycle
- Better visibility into the financial activities that improve the bottom line.
- Robust analytics and data visualization for data-driven decisions.
- Easier preparation of quarterly and annual financial statements.
Operations teams will benefit from:
- A single view of your purchasing lifecycle, from requisition to remittance.
- A unified purchasing experience for stakeholders across all locations.
- Curated, strategic sourcing that leverages the best prices and terms.
- An approvals process that leaves behind guesswork, rejected requests, and risk.
With an integrated end-to-end solution, your finance, operations, and procurement teams can take advantage of advanced features to make better decisions and improve bottom-line strategy.
If you’re ready to future-proof your financial operations with end-to-end automation, get to know Order.co by scheduling a demo of the platform.
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Maximum efficiency and line-level visibility are the gold standard for finance and operations teams. Operations teams are always looking to be more efficient. Finance teams need all the visibility they can get.
But, do companies always have efficiency and visibility? Unfortunately, no.
Is it possible to have more efficiency and visibility—on both your finance and operations teams? Yes.
The sad truth is, most businesses lack an organized approach to managing finance and operations. Finance teams don’t know what is being purchased, operations teams don’t know when products are being delivered or who is ordering what products. The top reason for mismanagement of finance and operations? The missing link between the two. Both departments must join forces to be as efficient as possible and help your company grow.
What happens when finance and operations teams aren’t aligned
Let’s paint the picture of what can go wrong when your finance and operations teams are not working together.
Your business is bound to experience frequent hiccups if your two teams don’t have a centralized way to operate. Some of the things that can impact your performance negatively are:
Siloed ordering and purchase information
70% of business leaders feel the data they use to analyze finances and make forecasts is not accurate.
The finding shouldn’t come as a surprise for many finance and operations professionals. Your purchase and ordering information will remain in silos if your operations and finance are not sharing insights. This takes a tremendous amount of time, money, and other employee resources.
No clarity on budget or spending
A budget is imperative to company growth. However, you can only stay within your budget if you are able to track all your expenses. However, that seldom happens when your departments are disjointed.
As a result, you can never be too sure where your money is going, and what you are spending. Therefore, lacking complete visibility into your spending is unacceptable, and is counterproductive to growth.
No way to plan for future growth
Planning for the future is crucial to surviving these difficult times. Resiliency is key. Many businesses are yet to come out from the impact of COVID, so any plan must be highly pragmatic.
However, you will need real-time data and insights to plan for your future growth. Unfortunately, that can come as a barrier if your finance and operations aren’t collaborating.
Most importantly, you won’t be able to access real-time data readily, which is a challenge for 21% of finance executives.
But there is still hope and you can take steps to get your two teams on the same page.
What happens when your finance and operations teams are aligned
Now, let’s focus on the flip side of things. Many businesses have been able to bring their finance and operations closer for a plethora of benefits.
However, it takes a bit of effort to ensure your two teams have a centralized way of operation. You should start by encouraging a change in your work culture.
The task would be to foster a more collaborative environment where employees feel motivated to work together. They should understand that the business can achieve its objectives only when the whole of it performs as a single unit. Empower your teams with the right tools to centralize your operations. For example, a B2B marketplace like Order.co can allow your finance and operations teams to stay on the same page. Some benefits of keeping your finance and operations teams aligned are:
Centralized and seamless purchasing
Order.co offers a user-friendly interface for finance and operations to…that’s right… order everything your business needs. They can use the same platform to source goods and services from multiple vendors. It also gives them a centralized way to manage suppliers and keep track of spending.
Let’s take the example of the Physical Rehabilitation Network (PRN). PRN’s product purchases were decentralized, and they relied on a very manual process for collecting and placing orders for each of their 140 locations.
Then came Order.co
Order.co allows PRN to order everything—every purchase—from a single place. Each of their locations found it very easy to use the software and place orders directly. PRN has a centralized way to track each order and know what purchasing is going on in every location. In addition, the company was able to save time and eliminate its manual purchasing process.
Fast and efficient order approvals
Approvals are necessary for every business in order to keep their purchasing under control. Not only are they necessary, but they should be quick and hassle-free. Instead, businesses waste endless hours trying to find who approved what, and why.
Sadly, that adds to the hours that you waste every year due to manual, inefficient processes. For most businesses, that can take up to 15 unproductive weeks per year. Admin and tedious paperwork are efficiency’s worst enemy.
Your finance and operations teams need an easier way to manage approvals.
Take the example of CorePower Yoga. CorePower Yoga was struggling to manage approvals for purchases across more than 140 locations. Worst of all, they had no way to track or automate their manual purchasing processes. They had to dedicate an employee who collected orders from all locations and placed them with vendors.
Order.co now allows CorePower Yoga to empower every location to order approved products. By placing restrictions on purchasing through approval workflows, Order.co also allows CorePower Yoga to save $50K in unapproved spending every month.
Granular, line-level visibility
Businesses need granular visibility into their spending for not only efficient expense management, but for future growth projections. Without proper visibility into your company’s purchases, it is impossible to budget and plan for any growth whatsoever. With line-level visibility, companies are able to see every single purchase made in a given month and how much was spent—thus making budgeting easier. Order.co enables businesses to consolidate invoices to have that exact line-level visibility companies need if they want to stay on top of every purchase and plan for future growth. It combines all invoices from your vendor purchases each month into a single monthly invoice. As a result, you can track and analyze every dime your company spends.
Accurate Budgets & forecasting
Let’s face it. Sometimes, employees on finance and operations teams may get a little distracted; they may accidentally put too many zeros after a purchase; they may forget (or lose) an invoice every now and then.
It happens.
However, finance and operations teams can eliminate human errors. Imagine: no more worrying about the quality of your financial data. It becomes free of mistakes. Invoices are perfectly coded automatically in Order.co, so you can import the data directly to your accounting system. This gives you constant, up-to-date information to make more informed financial decisions.
With that, you also have full visibility into each of your expenses.
Based on how your expenses match up with your budgets, you can generate vital insights about not only your finance and operations teams, but your company’s future growth as well.
Plan for future growth like a pro. With more accurate spend data, your future projections for growth are more likely to materialize.
Getting your finance and operations teams in Order
A business can reach new heights when its finance and operations collaborate. You can develop complete visibility into your purchases, orders, and payments. In addition, you can centralize your operations and improve vendor relationships by making timely payments. Moreover, you can process invoices faster and issue approvals with one click. The list of perks also includes cash savings, more productivity, and improvement in your bottom line.
Get your finance, operations, and entire company’s growth in order. Book a demo today to learn how Order.co can make that possible.
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Are your finance and operations teams still working in silos?
Most likely, yes.
So, what does that mean for your business?
For starters, you can be among the 49% of CFOs who don’t have timely and accurate data to drive real-time, informed decisions. Additionally, you may even feature on the list of 73% of finance professionals who complain about the lack of in-depth data.
The truth is sad, out there, and hurting your bottom line.
Moreover, it will continue to impact your business growth as long as your finance and operations work as individual teams. Unfortunately, that is what most organizations are going through, even in this age of technological advance. The flip side of the coin is, however, quite appealing and profitable. Your business can operate as a whole unit when your finance and operations managers put their heads together.
What are the results?
You get real-time, accurate, and comprehensive data to fuel strategic decisions; you can generate vital insights and make accurate forecasts; the two teams can take your company to a whole new level.
Both finance and operations teams are crucial to a business. Therefore, it only makes sense that they can deliver better results by collaborating and sharing knowledge.
Let’s explore the role and impact of both teams, and how getting them to work seamlessly together can make for higher levels of both efficiency and company growth.
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What does a typical finance team do?
Most of us think the job of the finance team is to maintain accounts and create financial reports. It also ensures tax compliance and helps the business stay within its budget.
Undoubtedly, those are the traditional responsibilities of a finance team. However, today, the duties of the finance department are not so trivial. In today’s world, a finance team guides all of the internal and external financial decisions of a company. It provides the number and insights required to stay competitive in the market.
So, what are some examples of the responsibilities of a modern finance team?
Conducting financial planning & analysis to facilitate strategic planning.
Financial planning & analysis is crucial to making realistic forecasts. It enables the business to predict how it will perform financially in the coming days.
The process pits forecasted results with actual ones to identify areas of improvement. It also allows the business to stay agile and deal with disruptions, like losing customers to a competitor.
Managing risks to avoid unpleasant surprises.
Most businesses today rely on debt to operate. As per Deloitte, the corporate debt of nonfinancial businesses grew by 5.5% annually on average between 2010 and 2019. In 2020, that percentage shot up to 9.1%. Debt is not always a bad thing. However, it brings a range of risks to the table. Therefore, finance teams try to identify and evaluate the risks applicable to a business. It looks at several factors like interest rates, legal nuances, and more to predict quantifiable impact.
This data empowers the organization to be in a better position to mitigate risks.
Managing and budgeting capital for optimum ROI.
The finance department is in charge of ensuring your business never runs out of money. Therefore, financial professionals manage working capital and make necessary forecasts. In addition, the team participates in capital budgeting to support business growth. It identifies the best projects and assesses the risks of investing available capital to derive maximum ROI.
Therefore, the finance team is (or, at least, should be) at the core of each and every company’s business decisions.
What does a typical operations team do?
Would you think of conquering Mount Everest without a guide?
Even trained mountaineers will not dare to climb Everest without a guide. You will surely need someone who is aware of the local conditions to chalk out the best route. Additionally, you will rely on their assistance to arrange suppliers or predict bad weather.
Your operation team performs the same task for your business. It ensures your company keeps running efficiently and effectively to meet all business objectives. However, the exact processes and responsibilities may vary across organizations and industries.
So, what is the main focus for operations teams?
Help the business run smoothly and profitably
An operations team stays on top of all internal details that ensure the profitability of a company. It tries to provide all the right conditions for the business to deliver the right products.
As a result, operations teams are closely tied to customer satisfaction. Take the case of a restaurant for example. The operations team will be in charge of looking after the inventory and raw materials. However, the process is more complex than many can imagine. You not only need to ensure enough raw materials but also their quality and freshness. Additionally, your operations will consider the cost of the materials, labor, and associated processes. It will also work with vendors and suppliers to create long-term relationships.
Some of the responsibilities of operations teams include:
- Managing and facilitating the optimum use of resources
- Ensuring products and services meet customer needs
- Helping C-suite in planning KPIs
- Assessing customer feedback to suggest improvements
- Optimizing supply chain to boost productivity
- Managing and minimizing costs and risks
The final goal of any operations team is to encourage all stakeholders to champion an organization’s value. It also plays a big role in quality management and strengthening the reputation of the company.
Therefore, the operations team is as vital as the finance team to any business or entrepreneur.
How can finance and operations teams work together?
A business can walk several ways to allow its finance and operations teams to work together. The process begins with a cultural change where everyone works to achieve business objectives.
We have seen how the responsibilities of finance and operations overlap for better results. However, organizations rely on different methods to facilitate collaboration. The simplest way to tie their processes together is to acknowledge two key truths:
Technology can come in handy to bring your finance and operations teams closer.
For example, spend management software can help your operations team to stay on top of monthly purchases and payments. In the same way, it can allow your finance staff to improve visibility over business expenses.
All team members can access accurate and real-time data from a single interface. As a result, you can also become proficient in expense management and spend management.
In addition, you can discover ample opportunities to cut costs and maximize value. AKA: grow your bottom line.
Automation can streamline the processes of both teams and lead to more profitability.
Your employees spend countless hours on manual and repetitive tasks. This applies to almost all departments—including finance and operations.
For example, your finance team has to go through endless invoices every day, week, and month. The process not only dents your productivity, but also adds to your costs and time. Fortunately, automation can be a key solution to streamline processes and eliminate manual work. Best of all, 1/3rd of tasks in 2/3rds of existing jobs have the potential to be automated. Therefore, it can help your teams save time and focus more on collaboration. It can also facilitate smooth operations and the expansion of your locations.
Take the case of High Level Health, for example. The company had to go through 400 pages of invoices and waste countless hours finding, verifying, and paying each and every invoice. However, High Level Health—in their expansion—utilized invoice consolidation and streamlined their vendor payment process using Order.co. They've since been able to achieve 100% invoice consolidation and save $4,400 in monthly costs.
Getting your finance and operations teams on the same page
Businesses can increase profitability, cut costs, and improve the bottom line when finance and operations work together. That’s a given. However, no matter how “simple” it may seem, some organizations still find it challenging to bring the two teams closer.
To those companies who find themselves struggling to unify their finance and operations teams and cultivate growth, here are a few tips:
Encourage more communication between your teams.
The first step of the process is to get the two teams to communicate more. You have to stay impartial and become the advocate for members of the two teams. You should aim to develop an environment like DevOps where developers and operations work together—only for finance and operations. Call it “FinOps”, or something like that. Be creative.
This way, both teams can share insights easier, faster, and collaborate to achieve your business objectives.
Standardize your business tools for optimum interoperability.
“Optimum Interoperability” seems like a big word. Technically, it’s two big words. Really, what it actually means is “the best way for your teams to communicate and work together”. Your teams may use a range of tools to work productively. That may work in some instances, but after a while, it may not always be the most efficient. In the modern world, you should always aim to standardize your business tools. Look for ways to integrate your apps using APIs or already integrated platforms.
Let's face it: Finance and operations teams are indispensable for businesses. Both teams impact the performance of the organization and growth. Therefore, it is imperative for both teams to work efficiently to achieve success. Moreover, the two teams should work together in close cooperation for making informed decisions.
Make growing easier on your business.
Book a demo today to find out how Order.co can help your finance and operations unify for unprecedented company growth.
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Ask any modern business decision-makers about the essence of trade accounts payable, and you'll soon realize that it's one of the greatest tasks they face. After all, businesses must pay their debts, and they cannot afford to get this wrong.
Managing invoices accurately and promptly is almost an art, and it’s the key to maintaining good vendor relationships. It's essential to understand the critical relationship between trade accounts payable and vendor relations and its impact on your company's bottom line.
In this article, we'll look at:
- What are trade accounts payable?
- How trade accounts payables are intertwined with procurement and vendor relations
- Managing the accounts payable process and its effect on profitability
- Why trade accounts payable matters
Download the free tool: Invoice Tracking Template
What are trade accounts payable?
Trade accounts payable (also called trades payable) refers to an amount that suppliers bill a company for delivering goods or providing services in the ordinary cause of business. When paid on credit, the company enters the billed amounts in the accounts payable module of their accounting software or balance sheet.
Any amounts owed to suppliers that the company immediately pays in cash are not part of trade account payables since they are not a liability. In the accounting system, businesses record trade accounts payables in a separate accounts payable account. They also credit the accounts payable account and debit whichever account closely represents the payment's nature, such as an asset or an expense.
It is worth noting that the classification of trade accounts payables is ‘current liabilities’ since they are payable within a year. When that's not the case, the business can classify the trades payables as long-term liabilities. Since long-term liabilities tend to have an attached interest payment, the accountant is more likely to classify them as long-term debt.
Trades payable vs. non-trades payable
One significant difference between the two is that you usually enter trades payable into the accounting system through a special module that automatically generates the required accounting entries. On the other hand, you typically enter non-trades payable into the system using a journal entry.
Trades payable vs. accounts payable
It's normal for some people to use the two phrases interchangeably, but they have a slight but important difference. Trades payable refers to the money you owe vendors for inventory-related goods — for example, business supplies or inventory. On the other hand, accounts payable include all your short-term debts or obligations, including trade payables.
How is trade accounts payable intertwined with procurement and vendor relations?
Traditionally, your procurement department is responsible for maintaining vendor relationships, including contract negotiations, the pursuit of discounting opportunities, compliance to terms, and repayment processes.
Still, it is essential to know that the trade accounts payable process also plays a crucial role in the daily business mechanisms to keep vendor relationships on a positive track.
Research reveals that 47% of companies pay one in ten invoices late, while 16% admit that they pay one in five invoices late. Only a paltry 5% of businesses assert that they always pay their obligations on time, whereas one in 12 firms never monitors its payments processes at all.
Late vendor payments risk causing disruptions in the supply chain and cash flow. Some of the causes of late invoice payments include lack of automation, slow internal processes, lack of capacity to manage invoice volume, and administrative error. Unfortunately, all these are mere excuses for poor performance. Besides, vendors shouldn't have to accommodate internal process flaws.
Supporting a strong, continuous supply chain
Business vendors are crucial to your company's success. Consider, for example, the retail and manufacturing sectors. Regular business relies on vendors to provide the necessary products, parts, and raw materials to complete their end offering. As such, these companies can't afford to lose their key vendors due to inefficient trade accounts payable processes resulting in late, lost, or faulty payments.
Automating your accounts payable workflow speeds up invoice processing and ensures your vendors receive payments accurately and on time. In return, vendors are likely to deliver goods swiftly and offer future discount opportunities.
47% of companies pay one in ten invoices late, while 16% admit that they pay one in five invoices late.
Profitability impact of trade accounts payable management
Just like other current assets or liabilities, trade accounts payable have a significant impact on your profitability. The single most critical thing you can ever do to maintain good vendor relations is pay your bills on time. Unfortunately, accounts payable management can get hectic and unwieldy. As your business grows, so does its suppliers and the invoices you have to pay.
Good vendor relationship management requires a mutually beneficial relationship between you and each supplier or vendor. A positive relationship is a win-win for all parties. Vendors will cut you good deals, suggest new and better products, and work with you on delivery policies and times.
It is prudent to cultivate good supplier relationships because they also mean increased company efficiency. To do this, always ensure that you:
- Pay your bills on time.
- Don't cut off suppliers without a valid reason.
- Keep open lines of communication.
- Elicit trust with all of your vendors and suppliers, regardless of how many you have.
In return, a good vendor could respond by offering you their best trade credit terms possible, hence maximizing your profitability.
One critical metric in any business's financial management process is its cash flow, which comes from business operations like financing and investing. It's worth noting that you generate profit from sales after paying all expenses.
Inadequate monthly cash flow means you won't have enough cash at hand to pay your bills on time, which means trouble with your suppliers. Often, vendors offer cash discounts if businesses pay within a specified number of days, like three months. That discount can have a significantly positive effect on your profitability.
Now, imagine getting cash discounts from all of your vendors and having enough cash on hand to take them. It will result in a significant effect on your net profit margin.
Why accounts payable management matters
The accounts payable management process focuses on ensuring that you pay your bills timely without choking cash flow. It further ensures you have sufficient liquidity to fund process optimization, investment opportunities, and product innovation to reduce your ongoing costs.
It's critical to optimize your accounts payable management, particularly for small business owners who rely heavily on their working capital compared to larger companies. Below are some reasons why accounts payable matter:
- Accurate and efficient workflows in your trade accounts payable system provide transparency and accuracy in your cash flow tracking and planning.
- Better cash flow management allows for more accurate budgeting.
- Effective management provides actionable insights that you can leverage to enhance contract negotiations and strategic sourcing. It also allows you to build stronger vendor relationships that give you access to better discount payment terms.
How do you audit trade payables?
The best practice to follow is to review the recorded cash disbursements subsequent to the corresponding balance sheet date. It allows you to determine which period to apply the related payables and whether it belongs to the previous one. Identifying unrecorded trade accounts payable enables you to manage all your current liabilities. You can also make payments on time to safeguard your vendor relations.
Trade accounts payable is among the essential tasks to get right. The risks of failure are too significant to leave to chance. A poor trade accounts payable process can damage your vendor relations and open you up to fraud risk.
Order.co helps finance and operations teams spend less time placing and managing orders. Peloton, Hugo Boss, XpresSpa, SoulCycle, and WeWork all use Order.co to:
- Place orders from one cart and approved catalog automatically across every vendor.
- Track real-time spending.
- Make actionable purchasing decisions.
Order.co automates your purchase orders, tracks delivery issues, saves you money, offers spend tagging and visibility, consolidates billing and vendor transactions, and unifies all your trade accounts payable data under one platform. To get started, schedule a free demo today.
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Accounts payable (AP) and notes payable (NP) are often used interchangeably, but in reality, they operate differently and serve distinct purposes within your financial strategy.
To properly manage either payable category, granular spend visibility is essential. Without it, the benefit of strategic financing can be diminished or even become a vector for financial risk.
We will define and contrast accounts payable and notes payable and illustrate how financing strategies offer maximum growth opportunities when paired with a dynamic procurement management tool. First, let’s get a clearer understanding of the differences between AP and NP.
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Accounts payable and notes payable defined
Accounts payable and notes payable are liabilities recorded as journal entries in a general ledger (GL) and on the company’s balance sheet.
Accounts payable refers to short-term liability accounts incurred for purchases with vendors and suppliers on credit. Notes payable are long-term liability accounts incurred through financing by banks and other lending institutions. Many business owners and managers assume accounts payable and notes payable are interchangeable terms, but they are not.
Let’s look more closely at the differences:
Accounts payable (AP)
- Short-term debt resulting from purchasing goods and services. These credit purchases are due for repayment within a year or less. (In practice, most suppliers seek Net 30 repayment terms.)
- Purchases do not incur interest within the repayment period and discounts may be offered for early payment.
- These short-term loans are non-collateralized. As long as invoices are paid promptly, suppliers will continue to fulfill new orders.
Notes payable (NP)
- Longer-term obligations to vendors or lending institutions. They have specific terms and maturity periods of either one year or less (short-term) or more than one year (long-term).
- Backed by written promises to repay (called promissory notes) that outline payment terms. Notes include the principal amount issued by the lender, interest payable, payment interval, and security or collateral terms. These elements are encapsulated into a formal lending agreement between the borrower and lender.
- Notes payable are customarily funded by banks, but they may also be paid to other financial institutions.
- Specific due date and repayment schedule. Notes payable are recorded and reported differently from accounts payable.
What are the benefits of long-term notes payable? (LTNP)
Leveraging financing can be an effective way of getting needed supplies and creating growth in the short term for companies that can generate revenue and adhere to repayment terms.
A long-term notes payable agreement helps businesses access needed capital attached to longer repayment terms (12–30 months).
- LNTP agreements are repaid with a set interest rate (like short-term notes payable).
- Long-term notes can be non-collateralized loans used for purchasing supplies or equipment. This gives businesses the funding they need without relinquishing any control over how those funds are used and without needing pre-approval from investors.
- Long-term notes payable provide the capital to invest in future growth, product development, and innovation, freeing up current assets for current operations.
- The LTNP is a low-risk financing option. It increases a company’s debt capacity and, therefore, displays deeper financial stability.
- Interest due can be deducted from the current year’s tax liability, lowering the overall cost of capital financing.
LTNP funding allows businesses to plan beyond day-to-day operations and fund innovation and growth. Using LTNP credit, you improve everyday control while building products and features to increase future revenue.
Pairing a financing strategy with a procure-to-pay solution
Leveraging the power of financing within your business allows you to grow faster, bring products to market within shorter timelines, and get needed supplies and equipment into service without waiting to raise revenue or constraining cash flow.
To make the best use of this strategy, you need strong visibility into procurement activities, and a granular understanding of your current liabilities. Without a process of strict budgetary control, the advantages you gain in securing long-term financing may be lost in poor cash management—you risk overspending on short-term liabilities and finding yourself unable to make payment obligations on your loan agreement when the bills come due.
Strong procure-to-pay (P2P) management helps companies keep a rein on spending and creates an audit trail and a business case for every purchase. Procurement software can build these guardrails into the ordering process so your stakeholders can get what they need without overspending.
You’ll get four basic areas of improvement from a good P2P process:
- Better visibility to optimize spend
- Reduced or eliminated maverick spending
- Streamlined supply chain management to avoid production delays
- Integrated invoice approval and payments to avoid fees and enable discounts
When you procure needed supplies using financing and ensure an effective budgetary process through P2P, you immediately see higher cash flow stability and lower costs. These conditions improve working capital to support growth further.
How does procure-to-pay (P2P) work?
Many businesses operate across several sites and via separate departments that replicate similar activities. It is common for the same goods and services to be needed by these separate departments and sites. Without an established P2P process, each location may end up generating its own supply chain, which often leads to frequent errors.
P2P systematizes every step of the procurement process:
- Requisitioning goods and services
- Selecting and evaluating suppliers
- Receiving and reconciling shipments
- Invoice approval and supplier payments
Goods and services can be requisitioned from the same suppliers across all departments, cleaning up your supply chain and greatly reducing errors.
10 Steps in the procure-to-pay (P2P) process
When each purchase follows a procurement plan with the following steps, it establishes accountability and ensures your business operations are transparent and efficient:
- Identify goods and services to be ordered.
- Raise a purchase requisition.
- Review and approve the requisition.
- Select the appropriate supplier based on known pricing, quality, and delivery standards.
- If there are no existing suppliers, create a list of potential vendors and issue requests for bids.
- Integrate requisitions to create a complete purchase order with specific order and delivery details for each site or department.
- Issue the purchase order to the supplier.
- Receive and approve deliveries.
- Check and approve supplier invoices with three-way matching.
- Pay supplier at the business’s discretion.
- Evaluate supplier performance.
While these steps are possible using a manual process, the volume of accounts and invoices in most companies requires automation to fully realize savings and control.
Using technology to power P2P success
When you understand the difference between accounts payable and notes payable, it is easy to keep them separate and use that difference to your advantage, meeting immediate capital needs and improving value creation.
Here are some of the top benefits of pairing strategic financing with P2P solutions:
Better finances: Good financing strategies with a solid procurement management system ensures your long-term plans are supported with smart short-term spending controls.
More stability: This comprehensive process keeps cash flow smooth and efficient.
Transparency: Automation and centralized data help accounts payable teams retain total visibility through every stage, from requisition to final payment.
Higher accountability: This standard of budgetary control ensures every purchase meets operational standards, adheres to corporate compliance, and stays within budget.
Tighter supply chain: Improved efficiency benefits both the company and its suppliers. P2P makes it easier for suppliers to meet delivery deadlines. This reduces their costs and allows you to renegotiate better prices and terms.
Better liquidity: Your working capital is less strained and more available for other immediate needs. It can also be allocated to future budget plans, including settling promissory notes.
By knowing the differences between notes payable and accounts payable—and learning to leverage each correctly— you can improve your cash flow and grow more effectively. Pair this with a robust P2P platform, and you’ll be set to optimize your finance function and further accelerate success. To learn more about leveraging financing and putting procure-to-pay to work in your procurement practice, watch our on-demand Finance and Automation webinar.
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