“Give me six hours to chop down a tree and I will spend the first four sharpening the axe.”
The above quote is often incorrectly attributed to Abraham Lincoln*, however, it strikes on the importance of having the right and finely-honed tools for the job.
And having the right tools on the job site can make all the difference between a project that’s on time and on budget than an over budget project, a site manager scrambling for extra time, along with stressed and overworked subs and suppliers that will tell you to kick rocks.
That’s why you spend evenings catching up on industry news. Lunches watching webinars. And weekends at far-flung conferences, all to discover the latest and greatest in construction—in search of just the right tools to do a better job.
And much like you sharpen the axe on both sides, sharpening up on back office tools—making sure the ones you’re using are as razor-sharp as job site tools—is paramount.
Recently, payment automation has emerged as one of those tools helping accounts payables—a vital back office function—perform at its best, slashing costs, earning rebates, and improving subcontractor and supplier relationships.
Here’s how accounts payable departments can hit pay dirt with payment automation.
Created by Ryan Mason
Paper checks are expensive.
Besides the direct costs associated with all things paper checks—envelopes, stamps, those little finger gloves, etc.—there’s also the hidden, difficult-to-calculate costs to consider. Those more nefarious costs, such as time spent stuffing envelopes, post office runs, even the time spent walking checks around the office for signature, can quickly add up.
Bank of America puts the total cost of paper checks as high as $20.
It’s no stretch, then, to see how reducing the use of paper checks can have a dramatic effect on the expenses in accounts payable.
Electronic payments deliver the 1-2 punch of cost savings by reducing both the cost associated with payment transmission (a fixed cost) and by reducing the time spent preparing and issuing payment (a variable labor cost).
And that’s just the foundation of payment automation.
Automating the payment process allows payments to be routed automatically to its rightful authorizer. Complex workflows—those requiring qualified approvals or multiple approval sign-offs—are sent with ease.
In an ideal accounts payable workflow, POs would automatically be matched to corresponding invoices, payment approvals would automatically be sent after materials have been received, and payment would automatically be issued to the appropriate sub or supplier.
In the realm of energy-efficient buildings, payment automation is the platinum-level LEED certified structure.
Building up revenue
Accounts payable has a perception issue.
AP has long been thought of as the department that costs money; often citing “you’ve got to spend money to make money” to validate its very existence. But perceptions are changing and a new way of thinking is emerging—accounts payable can contribute to a company's bottom line; AP can generate its own revenue.
Payment optimizing, the next rung up in payment automation, enables organizations to begin receiving rebates and start changing how AP is perceived. By paying subcontractor and supplier invoices through card, construction firms get payments out the door faster and earn rebates.
But relationships can’t be one-sided. That’s why this mutually-beneficial payment method allows construction firms to get payments out the door quicker and into the hands of those who’ve earned it.
This is helpful in improving cash flow for your partners; especially for those high dollar amount invoices. It’s highly unlikely that a materials or equipment supplier won’t welcome faster payment in exchange for the cost of transmitting payment over a card network.
Much like factoring or dynamic discounting is used to improve cash flow, so too can payment optimization be a valuable tool in improving cash flow for those you do business with.
Often, the revenue generated through payment optimizing allows a payment automation solution to pay for itself (and in a few situations, supplanting the associated costs in accounts payable with revenue).
Money is the lifeblood of every business.
It’s not difficult, then, to say that an interruption in the flow of money can spell the death for a business—especially for smaller subcontractors. But that’s what organizations do when they stymie its flow by floating payment.
Check floating, the process of stretching funds by exploiting the time it takes for a check to reach its destination is a horrible method to stretch that last penny. Plus, it puts unnecessary strain on supplier relationships.
Rather, the ability to schedule a payment with pinpoint accuracy is a much more efficient way to control the disbursement of payment—all without sacrificing subcontractor or supplier relationships. It’s one of those “nice to have” things about payment automation.
A much better example of how payment automation preserves relationships is by managing the master vendor file (MVF). The MVF contains critical payment information for each and every sub and supplier an organization does business with. Considering the number of subs and suppliers a construction firm deals with, the validation of this data suddenly becomes critical in ensuring correct payment is sent to the right bank account— a paid sub is, after all, a happy sub.
Payment automation, by combining all these things—slashing costs, earning rebates, and improving relationships—quickly becomes a tool your firm can’t function without.
* This quote appears to have originated from an advertisment in a 1960’s industrial drilling equipment trade magazine, “Road and Streets.”
A version of this article first appeared in August 2017’s issue of Construction Business Owner magazine.