Prepared by Accounting Services Team
Find below a summary of the document published by the Council and the National Accountants Foundation (“Document”), which highlights how strategic management of Net Working Capital (“NWC”) is necessary for the financial success of a company. This circumstance becomes even more essential with the introduction of the Business Crisis Code to monitor financial flows and maintain company solvency.
In such analysis, common problems and effective solutions will be explored to optimize the accounting management of the accounts payable cycle, offering valuable advice to improve the operational efficiency and the NWC (and therefore also the cash flow) of the company while maintaining solid relationships at the same time with suppliers.
1. Strategic management of the NWC and operational rules
According to the Document under review, in order for NWC management to be transformed into a strategic leverage for a company it is necessary to consider the following main operational rules:
- Constantly monitor financial flows – It is essential to start analysis at a management and administrative level to control and analyze the NWC and its dynamics. This allows us to intercept any signal that could influence the solvency of the company, avoiding any form of irreversible insolvency;
- Manage trade credits carefully – Managing trade credits is essential for customer loyalty. It is important to monitor the costs associated with credit management, such as costs of invested capital and costs related to unpaid credits. Adopting credit policies that balance the increase in sales with the management of risks associated with trade credits is crucial;
- Optimize inventories – Inventories represent a significant use of financial resources. Optimal inventory management requires careful evaluation of reorder quantities and times to avoid both excess and shortage of inventory. Establishing minimum levels of safety stocks and reorder points is essential to guarantee the continuity of the production process without tying up excessive financial resources;
- Evaluate short-term financial needs and synchronize financial flows – Management of the financial NWC includes the synchronization of outgoing and incoming flows. It is crucial to monitor interest rates, the risk of renewal of short-term loans and the risk of non-collection of receivables. This helps maintain a balance between cash inflows and outflows, ensuring the solvency of the business;
- Analyse income dynamics – The management of working capital requires careful analysis of income dynamics and economic balance. A company that does not generate satisfactory income risks not being able to fuel its financial and monetary circuit. It is essential not to limit ourselves to the determination of some indicators, but to delve into the dynamics underlying operational and strategic choices;
- Consider the influence of short-term decisions on the medium and long term – Decisions relating to the management of working capital must be considered in a broader context than the short-term one. It is important to evaluate the effects that decisions regarding working capital management could produce on the company’s solvency, in terms of capital solidity and corporate debt.
2. Management of the account payable process and trade debts: improve your cash flow and NWC
In addition to what has already been indicated in the previous paragraph, an important aspect concerns the effects that the accounting management of the purchasing cycle can have on the NWC which is often underestimated.
In fact, effective accounting management of the accounts payable cycle, not only guarantees efficiency in payments but also contributes to maintaining solid relationships with suppliers, correctly estimating cash flow and avoiding liquidity problems.
However, many companies find themselves having to face problems related to incorrect or late registration of purchase invoices, with negative consequences that can reverberate on various aspects of company management.
Ineffective management of the accounts payable cycle can lead to several problems, including:
| N. | Phase of the Accounts Payable Cycle | Problem | Description | Negative Effect |
| 1 | Invoice Receipt | Delay in receipt | Invoices are not received on time. | Delay in registration and approval of invoices. |
| 2 | Invoice Registration | Delay in registration | Invoices are not registered promptly. | Delay in closing financial statements, outdated economic and financial view. |
| 3 | Invoice Approval | Difficulty in approval | Invoices are not approved quickly. | Delay in payments, difficulty in cash flow estimation. |
| 4 | Supplier Payment | Delay in payments | Payments to suppliers are not made on time. | Reduction in service quality, supply interruption, loss of supplier trust. |
| 5 | Cash Flow Management | Difficulty in management | Unpredictable cash flows. | Liquidity problems, difficulty in meeting financial commitments. |
| 6 | Company Reputation | Reputational damage | Inefficiencies and delays damage the company’s image. | Loss of trust from suppliers and other stakeholders. |
| 7 | Failure to properly recover the VAT | VAT compliance implications | Delays and errors compromise the proper exercise of the right to deduct VAT on purchase invoices | Risk of penalties and missed opportunities for VAT recovery. |
| 8 | VAT payments not correctly handled | VAT compliance implications | Delays and mismanagement have impacts on the proper payment of VAT in cases where the purchaser is required to apply the reverse charge mechanism. | Risk of tax penalties. |
Importance of accounts payable management for year-end or periodic closing
Year-end closing is a crucial moment for every company, where it is essential to have a clear and precise accounting situation for the preparation of the financial statements. Issues related to the management of the accounts payable cycle become even more relevant in this context, as they can delay the closing of financial statements and compromise the quality of accounting information. Effective management of the accounts payable cycle is therefore essential to ensure a smooth year-end closing and to present accurate and reliable financial statements.
Solutions and benefits of outsourcing the accounts payable cycle
To address these issues, many companies choose to outsource the accounts payable cycle. This choice can offer numerous benefits, including:
- Allocation of company resources to higher value-added functions: By outsourcing the accounts payable cycle, internal resources can focus on core and higher value-added activities, improving the overall efficiency of the company.
- Reduction of overall costs: Outsourcing can be more cost-effective compared to internal management, considering personnel costs, training and overheads.
- Consistent quality level: Relying on a team of experts ensures a consistent quality level in service delivery, thanks to the specialized skills and continuous training of the professionals involved.
- Clear and timely reporting: A well-structured outsourcing service can provide clear, precise, and timely reporting, supporting the management’s strategic decisions.
- High standards of Confidentiality: Outsourcing processes ensure high standards of data and information confidentiality, protecting the privacy and security of company information.
Conclusion
Effective management of the accounts payable cycle is fundamental for the success and sustainability of any company. Relying on expert professionals and considering outsourcing as a strategic solution can make a difference, ensuring precise, timely, and high-quality accounting management. Do not let accounting issues compromise the future of your company: contact us and find out how we can support you in achieving your goals.
If your company is facing issues related to the management of the accounts payable cycle, we can assist you in resolving these issues, both in temporary situations and on an ongoing basis, offering customized outsourcing solutions.
Contact us and fill out the attached form or write to it_pwc_accounting_bd@pwc.com and find out how we can help you improve the efficiency and quality of your accounts payable’s management.