In today’s competitive business environment, optimizing cost savings on accounts payable is fundamental to maintaining a healthy bottom line. Achieving this goal, however, is not as straightforward as it may seem, as it involves understanding various aspects such as cost avoidance, cost reductions, process optimization, and stakeholder education. In this comprehensive guide, we will explore these concepts and provide you with strategies to overcome obstacles and maximize your cost savings in accounts payable.
Understanding Realized Cost Savings
To begin with, let’s delve into the concept of realized cost savings. Finance and procurement departments often approach “cost savings” differently, with finance focusing on “hard savings” through cost reductions, while procurement targets “soft savings” using cost avoidance strategies. The potential cost savings negotiated by procurement are known as identified cost savings, which only become realized cost savings if internal stakeholders adhere to contractual terms and the vendor complies accordingly.
These realized cost savings are tracked over time to verify that projected savings match actual ones. However, various roadblocks can hinder this process, making it difficult to achieve realized savings that match identified ones.
Potential Roadblocks to Realized Cost Savings
Several factors can obstruct the path to realizing cost savings in accounts payable:
These challenges can create discrepancies between identified and realized savings, impacting your organization’s financial health and budgeting accuracy.
Strategies for Achieving Optimal Realized Savings
To maximize realized cost savings, it’s essential to establish a strong connection between finance and procurement departments. Implementing the following strategies can help you achieve your budgeting benchmarks and procurement savings goals:
1. Establish Formal Cost Savings Practices
Creating a formal system that connects identified savings to realized savings on the final financial statements can foster collaboration between finance and procurement. This process involves:
- Identifying the type of savings (e.g., cost reductions or cost avoidance).
- Specifying the source of baseline data (e.g., historical spend data, industry trends).
- Recording spend categories, general ledger codes, and relevant cost centers for all savings opportunities.
- Providing detailed forecasted purchase volumes.
- Including additional information related to cross-dependencies and assumptions (e.g., market trends).
- Securing finance approval for procurement savings opportunities to ensure transparency and establish both departments as strategic partners.
2. Implement Procure-to-Pay (P2P) Software
A robust, cloud-based procure-to-pay (P2P) software solution can streamline the tracking and improvement of realized cost savings. With advanced automation, artificial intelligence (AI), and data analytics, P2P software can:
- Centralize all spend data on a single platform
- Leverage spend data for contract negotiations
- Integrate with supplier systems, including support for electronic invoicing and payments
- Enforce guided buying protocols to eliminate rogue spend and improve compliance
- Automate invoice processing, including automatic three-way matching
- Identify compliance issues and spend patterns for better decision-making
- Integrate with finance to balance cost savings and cost avoidance in budgeting, forecasting, and sourcing decisions
3. Prioritize Strategic Sourcing
Having a streamlined, flexible, and resilient supply chain is critical for maximizing realized cost savings. An effective P2P solution can help you achieve this by:
- Onboarding suppliers efficiently using a supplier portal
- Identifying top suppliers and potential partners
- Eliminating redundancies while including contingencies
- Prioritizing suppliers that support eInvoicing, compliance monitoring, and punch-out catalog integration
Realize Your Cost Savings Potential
Don’t let opportunities for cost savings and value creation slip away. By forging a strong partnership between procurement and finance, investing in procure-to-pay software, and practicing strategic supply chain management, you can realize the cost savings you pursue, practice strategic cost avoidance, and ensure compliance among both internal and external stakeholders.
Remember, the key to achieving realized cost savings in accounts payable lies in understanding the challenges and adopting strategies that address these obstacles. With a strong collaboration between finance and procurement, the right tools, and a focus on strategic sourcing, your organization can unlock its full potential for cost savings and value creation.
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