Dissecting Digital Payments Critical to Cash Flow
The pandemic has accelerated a number of business shifts, forcing them to adopt at least some modernization of back-end processes. However, there are still pockets of operations – particularly with purchasing or accounts payable (AP) – where there remains room for improvement and, by extension, better visibility into cash flow.
Peel the onion a bit, and it becomes apparent that many companies aren’t as digital savvy as they seem – certainly not when it comes to payments. The conversation took place against a backdrop of 21% of COOs at the largest companies saying they weren’t digitizing their payments because they already had robust systems in place.
As Clark noted: “One person’s ‘digital’ is not the same as another person’s ‘digital’. »
To be sure, he said, it is possible to achieve at least some level of scale, doing things the old fashioned way relying on manual activities and even purchase orders, paper bills and checks. In some cases, there may be some hype in the mix, where leaders might claim they are further ahead of the tech curve than they actually are.
Small businesses in particular are realizing the benefits of digitization, with 70% of small businesses recognizing the benefits. No business is too small to make the digital leap, Clark argued, especially companies with limited resources that can then reallocate staff to high-value tasks.
The new challenges
Regardless of the size, volume and complexity of a business, new markets present waves of challenges, Clark said. These companies then have to address the pain points that exist in their own day-to-day operations and where digital initiatives have failed.
It is increasingly recognized that these points of inefficiency must be resolved as soon as possible. More than six in 10 chief financial officers (CFOs) surveyed said working capital is an extremely important factor in maintaining healthy balance sheets. And the right sourcing strategy ultimately leads to a better impact on payments and cash flow on the back-end of that same business.
But digging a little deeper, cash conversion cycles are very much influenced on both sides of the equation, namely AP and Accounts Receivable (AP) activity on the part of buyers and sellers. As Clark said, when you look at AP, you’re looking to optimize payable days; when focused on AR, it is Days of Exceptional Sales (DSO).
In a non-digital world, with a high incidence of paper check-ins and payments, it’s harder to optimize those same sides of the coin. Digitization brings a better level of visibility into the timing of payments and invoices, he said.
He noted the inefficiencies inherent in traditional processes. Take, for example, a relationship where a company has 60-day payment terms with a supplier. The company that pays this supplier in 45 days gives up at least some of its own cash flow to this supplier, perhaps even unnecessarily. Conversely, being paid on the 75th day of a 60-day term means that the payee loses 15 days of cash.
It becomes an advantage to connect digital payments and a payment strategy to things happening “upstream,” Clark said. Businesses should strive to ensure their invoice distribution channels are the best possible, minimizing exceptions and disputes that can lead to extensive DSOs.
“A holistic 360-degree view is what drives the benefits of freeing up working capital,” he said.
This has positive ripple effects, he added, especially in an inflationary environment where companies don’t have to tap into capital markets.
Clark told PYMNTS that businesses of all sizes reap the anti-fraud benefits that come with digitalization. Fraud has moved up the list in terms of business priorities and can help with digital record keeping, verification and authentication of the entities a business transacts with.
If there’s better transparency in the mix, then problems tend to stand out a bit more, and leaders need to be aware of what needs to be fixed, he said.
“A red flag that’s been raised here brings us to the right scenario, the vendor review, the steps to make sure there’s no fraud,” Clark said.