Insight

Optimizing Accounts Payable

The international component of accounts payable (AP) typically comprises just a small portion of the overall AP function.

However, due to the complexity and size of these payments it is an important component that requires strategic management. Efforts to improve processing of international AP can yield important operating efficiencies and economic benefits. The international component of accounts payable typically comprises just a small portion of the overall AP function. However, due to the complexity and size of these payments, it is an important component that requires strategic management. Efforts to improve processing of international AP can yield important operating efficiencies and economic benefits.

Globalization has given a dramatic rise to the amount of business that even small to mid-sized companies can do in overseas markets. Despite the financial crisis in 2008-09, global trade has and continues to grow. U.S. based importers that deal with developed economies in Europe, Asia, and North America frequently transact with these countries in local currencies, including the Euro, British pound, Swiss franc, Japanese yen, Canadian dollar, and Mexican peso. AP professionals can optimize their bottom line by consciously implementing processes to work effortlessly across all of these currencies.

Electronic Processes Equal Efficiency

It almost goes without saying, but it’s important to note, that payments are most efficiently processed through electronic means as opposed to outdated paper-based alternatives. AP professionals should make every effort to move their international AP to 100% EFT, or “electronic funds transfer.” Online payment and reporting tools, offered by banks and specialized payment companies, enable automated processing of international transfers and simplify the process through simple order entry and the convenience of having all beneficiary bank account information stored for repetitive use on a secure system. Paper drafts can be lost or stolen and take weeks to clear, potentially upsetting relationships with valued international suppliers. The one-time effort required to gather current bank information for international beneficiaries, such as an IBAN (International Bank Account Number) or the SWIFT BIC (Bank Identifier Code) address is well worth the investment, as it will ensure that payments to foreign markets are delivered as seamlessly as domestic U.S. dollar payments.

Save on Currency Conversions

The bulk of the cost incurred in processing international foreign currency payments is in the rate of exchange. Banks can charge a heavy markup in foreign exchange rates when converting U.S. dollars to foreign currency for small to mid-size corporate clients, typically levying an exchange-rate markup of 3% to 4%. For example, if you pay a $100,000 invoice, it will cost $3,000 to $4,000 to change from U.S. dollars to the foreign currency. There is a viable alternative that offers much better value to international corporate clients: financial MSBs, or Money Service Businesses, specializing in corporate foreign exchange and international payments that do the same currency conversions that banks do, but at a more competitive exchange rate. The savings on each currency transaction will positively impact your company’s bottom line from the very first transaction.

Many companies erroneously believe that it is easier to simply pay foreign suppliers in U.S. dollars than to transact in foreign currency. This line of thinking wrongly assumes that by working just in U.S. dollars, the company doesn’t have to deal with exposure to foreign currency fluctuations. Nothing could be further from the truth. When a foreign supplier invoices a U.S. company in U.S. dollars, it factors in an exchange rate to account for the risk it incurs waiting 30 or 60 days to get paid by U.S. clients.

Remember, the foreign suppliers have to take the U.S. dollar amount and convert it to their local currency, so they may mark up the U.S. dollar invoice by 10% or more. Simply stated, the U.S. dollar invoice will be higher than if it were stated in foreign currency. At a minimum, U.S. companies can request that they be invoiced in both U.S. dollars and foreign currency. A simple currency rate check enables the AP professional to determine if it is cheaper to pay the U.S. or foreign currency amount.

Because the timing of currency purchases impacts your ultimate cost, it’s important to stay apprised of currency fluctuations. Numerous domestic and international, political, economic, and other factors shape the cost of each currency. Market commentary and insight from an informed specialist is an easy way to stay in touch with market-moving trends. Look to your bank or MSB to offer a variety of daily, monthly, and annual overviews of the currencies you require in order to optimize the timing of your sensitive currency purchases, and thereby potentially save your company money.

Processing international AP payments can be problematic if the provider has mediocre service. Large banks tend to provide dozens of products and therefore do not focus on delivering a service customized to the unique needs of companies that regularly pay foreign suppliers. MSBs that specialize in foreign exchange and international payments provide a higher quality service centered on a dedicated account representative who knows your business and seamlessly supports every step of your payments from initiation through to final delivery around the world.

Andrew Woelflein Chief Strategy Officer Tempus

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