When considering the different types of costs in business, many business owners and finance leaders focus on cost savings or cost avoidance. Cost avoidance involves taking action to prevent a specific expense from hitting your bottom line, or reducing a specific line item. For instance, a restaurant could practice cost avoidance by substituting pricier out-of-season ingredients with commonly found local produce.
Cost avoidance can be hard to quantify. Cost savings are more tangible. Cost savings appear on the budget and in financial statements as a decrease in spending. For example, a company could spend 10% less than the previous year on office supplies. The simple calculation for cost savings is to subtract the new price from the original price.
Both of these cost KPIs are important to track, but few business owners are also practicing cost optimization. Cost optimization is one of the few cost KPIs that can enable the business to run smoothly while avoiding unnecessary spending and without sacrificing the customer or employee experiences.
The formal definition of cost optimization by Gartner is, “a business-focused, continuous discipline to drive spending and cost reduction while maximizing business value.”
What does this mean in practice? Cost optimization ultimately combines the best of cost avoidance and cost savings. This practice seeks to find the best price and terms for business purchases while at the same time minimizing the cost of internal processes by automating, standardizing, and digitizing workflows.
Cost optimization centers around the concept of value: doing more with less. Rather than seeking to achieve short-term profit by slashing costs, cost optimization looks at how to make use of existing assets, increase efficiency, and enable employees to perform better with the right tools.
Cost optimization can be applied to many functions within the organization. Many business leaders focus on optimizing spending in the business’ supply chain, inventory management, and cash management. Accounts payable is one area that is also ripe for cost optimization strategies.
Often, optimizing accounts payable isn’t a priority for business leaders. “Because accounts payable is a back-office function, it doesn’t always take center stage as businesses look to grow or build competitive advantage. In fact, often accounts payable takes a back-seat to management’s competing priorities,” wrote Deloitte.
However, cost optimization in accounts payable has implications for other parts of the business, and optimizing this function can have a ripple effect. Cost optimization goes beyond ensuring invoices are received and processed expeditiously, and emphasizes the importance of freeing up working capital to fuel growth.
Cost optimization in accounts payable requires implementing a few key best practices. These include the following:
Many businesses still receive and route invoices on paper. This means significant resources are dedicated to inputting data, tracking down the stakeholders needed to approve the payment, and moving the invoice through the workflow.
Depending on the size of the company, it can take up to 25 days to process a single invoice. Businesses risk incurring late fees, damaging their relationship with vendors, and other costs when invoice processing takes nearly a month.
Automating this process with invoice automation software can speed up this process and reduce the resources spent on accounts payable.
When there are multiple systems used for vendor payments, it can be difficult to gain visibility into spending data. Centralizing accounts payable into one central platform can help businesses cut overall annual expenditures by 5% to 10%. Tools like Glean AI help accounting teams to review invoices and make quick financial decisions on the spot.
By centralizing vendor data, teams can align quickly on budgets and seamlessly collaborate on spend decisions. Plus, Glean AI's proprietary benchmarking data empowers your company to negotiate better deals with your vendors and increase cost optimization.
Research found that the typical small business pays 450 invoices a month with a 1.29% duplication rate – about six duplicate invoices a month. The average amount on those invoices was $2,034, meaning that these small businesses are losing about $12,000 per month if each duplicate invoice is paid.
[Read more: How to Avoid Double Invoicing]
Eliminating the risk of double invoicing is a clear cost avoidance strategy. Most organizations rely on manual processing to detect duplicate invoice payments. But, implementing an intelligent accounting solution makes it much easier to avoid double invoicing.
Many organizations endorse the strategy of extending payables as long as possible to maximize free cash flow. Unfortunately, this practice comes with many risks and disadvantages. Delaying payment can damage supplier relationships, causing slower delivery times and reluctance to provide great customer service. There are hidden costs to waiting to pay your invoices until the last moment.
A better cost optimization strategy is to use the right software to process invoices on a timely basis. Use this capability to negotiate with vendors for discounts. Explore the possibility of getting payment discounts, rebates, or other incentives for paying your invoices within two or three days of invoice receipt. You won’t be locked into early payment, but you can take advantage of the cost savings potential.
Cost optimization is both a practice and a mindset. Implementing tools like Glean AI can help you start more efficiently managing your budget, enabling your AP team to work productively, reduce errors, and streamline workflows. But, cost optimization in AP is just the beginning.
“By improving accounts payable governance, setting up clear management processes and consistently tracking key metrics, businesses can streamline their processes and inject a working capital culture into the enterprise,” wrote Deloitte. “Approached effectively, this can strengthen corporate cost management, reduce process complexity, minimize the risks associated with routine transaction processing and enhance vendor contract compliance.”
To learn more about cost optimization and Glean AI, request a demo, today.