This piece shows up in Digital Commerce 360 and is penned by a senior at a Fintech, specializing in payments and receivables. One of the many things that the pandemic has highlighted (highly reinforced might be more accurate) is that ‘cash is king’ (in the working capital sense of course, since all cash payments have declined quite a bit during the past eight months). So this article focuses on the importance of timely payments and collections strategy/effectiveness. We recently covered this in a webinar on cash cycle automation, which is directly related to improving a company’s working capital management capabilities.
‘As many organizations battle against a backdrop where sales have slowed, they’ve had to adapt to a blazing change in where and how they work. Companies find themselves at an inflection point where embracing digitization has become mission-critical—especially when it comes to the order-to-cash process….But the truth is, a reluctance to abandon traditional payment methods still exists in the B2B industry, as evidenced by the fact that 42% of B2B payments (which account for $25 trillion annually in the U.S.) are still made by paper check. But the winds of change are beginning to blow: a recent study of small to large businesses found that 64% of firms say they are shifting away from physical invoices, and 70% say they’re planning to automate their accounts/receivable process.’
Two of the key components of the cash conversion cycle are DPO (more controllable) and DSO (less controllable), and the author points out that pre-pandemic, payers were extending DPO through delayed payments. This of course puts pressure on suppliers who need to fund operations. Borrowing money to fund short term liabilities is not a good way to manage a business, which is exacerbated as one moves down the size scale of businesses. Smaller businesses have a tougher time raising money to begin with. Automation helps solve this by digitalizing processes and placing more decision intelligence in the hands of the trading partners.
‘There’s no denying that the pandemic and its ensuing economic downturn have created a list of challenges for businesses that are unlike anything they’ve experienced before. Besides the obvious—that COVID-19 has forced most businesses to develop survival-first responses that include reduced spending—several other factors have contributed to a landscape that’s strapped for cash and, as a result, has placed many businesses on the brink of collapse….For one, supply chain disruptions have caused many businesses to go under and others to rethink the entirety of their global supply chains, meaning churn rates are higher. Second, accounts-receivable and accounts-payable teams who’ve been tasked with maintaining the financial health of their organizations have had to adapt to remote configurations almost overnight. With B2B payments historically lagging when it comes to technology adoption, this only compounds the complexity and inefficiency inherent in highly manual tasks and outdated processes….And third, with studies finding that one-third of businesses say the biggest impact on cash flow is getting paid by clients on time, delays in receiving payments are proving to have significant negative consequences as organizations take hits to their days sales outstanding (DSO), the average number of days it takes a company to collect payment after a completing a sale.’
Worth a quick read to understand some of the pressure being placed on businesses and why the rush to automation is occurring as we speak (or read, I suppose).
Overview by Steve Murphy, Director, Commercial and Enterprise Payments Advisory Service at Mercator Advisory Group