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Improve cash management

When customers buy on credit the supplier assumes all the credit risk. Small and medium enterprises (SME’s) are often challenged with increased days sales outstanding (DSO) due to lengthy payment terms and this can be compounded by late payment. Large companies are also under pressure to improve working capital by extending their days payables outstanding (DPO) and reducing the number of debtor days on their own outstanding payments.

This increasing tension between reducing DSO while lengthening DPO implies more businesses, irrespective of size, are concerned about cash-flow and liquidity and e-Invoicing has a key role to play here.

Electronic invoicing is an important means to achieve three cash management objectives: enhanced cashflow, enhanced spend management and increased visibility in the invoicing process.

Enhanced cashflow

Capturing early payment discounts was cited as important by 87 per cent of respondents to Paystream’s 2011 eInvoicing adoption benchmarking survey — little surprise in an economic environment where interest rates are low to non-existent. A one per cent discount equates to 18 per cent annualised. Add to this, a recent Deutsche Bank survey showing the main reason that organisations miss out on discounts is internal delays in settling the invoice and it is obvious why eInvoicing is an effective cash management tool.

The shortening of the order-to-pay cycle is not just good news for the buyer, it reduces the supplier’s order-to-cash cycle. While the buyer captures the discount, the supplier is paid more quickly, reducing their DSO and injecting much needed cash into the business.

Enhanced spend management

Spend management programmes can identify sources of inefficiency, waste and abuse by aggregating data from purchasing, contracts and AP systems into a data warehouse which can be analysed for cost-saving opportunities.

Examples might include reducing maverick, off-contract buying, cancelling unused services and consolidating spend with fewer suppliers. In categories such as travel, legal, utilities and telecommunications expenses, spend management can provide insights which reduce costs by 2–10 per cent.

Regardless of spend category, a key enabler for spend management programmes is the ability to receive electronic invoices from suppliers. Only by having all information instantly available in a digital format can an organisation perform the advanced analytics that make these programmes possible.

Increasingly, commentators are discussing the benefit of optimising a third supply chain. Organisations have sought to optimise their physical and more recently, their financial supply chains. The next few years will see leading companies begin to optimise their information supply chain.

Increased invoice visibility

Paper or e-mail based invoices take longer to become visible in AP systems. They also have a much greater potential to get lost in the approval process. Without visibility to invoices in the approval process, cash managers lack the comprehensive data necessary for forecasting and forward planning.

A large invoice which is not discovered by the treasury organisation until shortly before payment, could result in a significant cash deficit relative to forecast. As a result, a business may need to borrow funds at the last minute at an expensive premium. Suppliers may begin to cancel orders due to non-payment or late payment of invoices. In addition, fraudulent invoices can more easily enter the system and be much more difficult to identify.

By processing invoices electronically, all upcoming payments become visible to the treasury organisation in the accounting system almost as soon as the invoice is received, improving forecast accuracy. Invoices can be routed, approved and settled quickly meaning that buyers can take advantage of more effective discount management.

Why pay suppliers on-time (or early)?

Late payments, either through bad process or extension of payment terms is compounding credit risk for suppliers who are faced with the double-whammy of lack of access to credit and a longer cash conversion cycle.

SME lack of access to credit is well publicised and this was highlighted in 2011 when company insolvencies in the UK rose and one of the reasons cited by analysts was tight credit conditions. Getting paid on time is such a widespread challenge that the European Union has updated its late payments directive to ensure private companies settle their bills within 60 days.

Paying on time offers buyers a simple method of injecting liquidity into the supply chain. It reduces the need for suppliers to take high-cost financing options such as factoring receivables and asset-based lending and indirectly avoids supply chain disruptions through insolvency. Alternatively, some large buyers are optimising their own working capital by offering discounted early payments or by engaging in Supply Chain Finance (SCF) programs where banks offer alternative funding to suppliers by financing approved invoices (payables).

Unsurprisingly, by helping key suppliers reduce working capital concerns this helps their business run more efficiently and allows them to provide more value to you. It is also logical that if the cost of goods is based on the supplier’s current cost of borrowing, by reducing the supplier’s need to borrow or enabling lower-cost financing options the cost of goods will reduce over time.

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