The growing possibility of a recession has cash managers bracing for a cash crunch.
Cash managers know that a decline in economic activity may result in decreased customer spending, delays in receiving payments, difficulty extending loans or credit lines, and challenges managing inventory because of unpredictable demand. All of this will make it harder for businesses to generate the cash flow they need to cover their operational expenses and to manage their cash flow effectively.
Electronically delivering invoices to customers is one way that cash managers can accelerate their cash flow and improve their cash forecasting, no matter the economic climate. Compared to electronic invoices, paper invoices sent through the mail take longer to prepare and deliver, are more likely to become lost or misfiled, take longer to approve, and make it harder for customers to pay.
This article details how electronic invoicing improves cash flow during a recession.
Cash flow challenges during a recession
An economic slowdown can create big cash flow challenges for businesses.
- Payment delays. Customers may be unwilling or unable to pay their invoices when times get tough. Others may delay payments or extend payment terms to conserve cash. Delayed payments can strain a company’s cash flow and make it harder to accurately forecast cash.
- Lower revenues. Customers typically buy fewer goods and services during a recession. Lower sales volumes can put the squeeze on cash flows and complicate cash forecasting.
- Tighter credit. Accessing credit is harder and significantly more costly during an economic slowdown, especially for small businesses. Without the working capital provided by loans and lines of credit, businesses could quickly find that it harder to maintain their operations.
It’s up to cash managers to help their business avoid these cash flow issues.
The impact of mail delivery on cash flow
Delivering customer invoices as paper through the mail can expose and exacerbate the cash flow management challenges that businesses are likely to face during an economic slowdown.
- Longer payment cycles. It can take a week or more to compile and print a paper invoice, setting a company’s Day’s Sales Outstanding (DSO) back from the start.
- Delivery delays. As a result of reductions in the U.S. Postal Service’s mail delivery times, it’s taking longer than ever to get paper invoices into the hands of customers.
- Lost or misplaced invoices. It’s not uncommon for invoices sent through the mail to be lost or misplaced. Worse, the problem often isn’t discovered until the invoice becomes past-due.
- Limited tracking. Short of making a call or email, it’s hard for suppliers to know whether an invoice sent through the mail was received or where it stands in the approval process.
- Longer invoice approvals. It takes accounts payable departments four times as long to manually approve a paper invoice as it does to approve an invoice sent electronically, according to benchmarking data by the Institute of Finance and Management (IOFM).
These challenges can slow down cash flow and complicate cash management and forecasting.
How does electronic invoicing improve cash flow?
Delivering invoices electronically can help a business maximize its cash flow. Here’s how.
- Faster invoice delivery. Electronic invoices can be instantly generated directly from any enterprise resource planning (ERP) application or accounting software package and delivered to a customer within moments. And there’s no chance of electronic invoices becoming lost, misplaced, or stolen. Delivering invoices faster can have an impact on a company’s liquidity. Some businesses have reduced their payment cycle by 20 days through electronic invoicing.
- Fewer invoice disputes. Generating electronic invoices directly from an ERP application or accounting software package reduces the possibility of errors that result in customer disputes. It can take days or weeks of back-and-forth emails and calls to resolve a single dispute. Electronic invoicing can reduce invoice exceptions and discrepancies by half, studies show.
- Enhanced control and security. The sensitive information contained on invoices have made them a prime target for bad actors that want to commit fraud. Electronic invoice solutions use encryption and other security measures to prevent tampering or unauthorized access.
- Real-time tracking and reporting. Suppliers receive confirmation the moment a customer receives their invoice electronically. And suppliers always know where an electronic invoice stands in the process. The complete transparency provided by electronic invoicing solutions empowers suppliers to take quick action when invoices go missing or seemingly get stuck in the process and make it easier to monitor balances and accurately predict cash inflows.
From faster cycles to better visibility and control, electronic invoices eliminate the friction that traps working capital on the balance sheet and make it challenging for businesses to accurately forecast.
How to choose the right electronic invoicing solution
While cash managers may not lead the project team charged with finding an electronic invoicing solution, they will have a say in the solution that gets chosen. Here are some key considerations:
- Seamless integration. An ERP or accounting software package is the financial nerve center of the business. To ensure full visibility, accurate forecasting, and smoother reconciliations, look for an electronic invoicing solution that integrates directly with your ERP platform.
- Scalability. While business growth may be the furthest thing from a cash manager’s mind during an economic slowdown, it’s imperative that an electronic invoicing solution can quickly be scaled to support higher volumes without the need to hire additional staff.
- Analytics. What if you knew the likelihood that a customer is going to pay on time. The artificial intelligence (AI)-powered analytical tools in some electronic invoicing solutions make that vision a reality. The technology can review years of historical data to understand the payment behavior of each customer to predict when payments are likely to arrive. What’s more, the technology will alert you when it believes a timely payment could be in jeopardy.
- Risk mitigation. Invoices intercepted by bad actors can delay cash flow and put payments at risk. Look for an electronic invoicing solution that offers complete tracking, adheres to industry standards for data protection and complies with legal and regulatory requirements.
- Ease of use. An electronic invoicing solution can’t help a business accelerate its cash flow if customers believe it’s too complicated to use. Look for a solution with an intuitive user interface, easily customized invoice formats, built-in help, and support that’s available 24/7.
An electronic invoicing solution with these attributes will help accelerate cash flow.
Conclusion
Businesses adopting electronic invoicing experience an average improvement of 64 percent in cash flow management, Billentis reports. The technology accelerates cycle times, facilities timely payments, and provides the visibility required to better manage cash flows. With the right electronic invoicing solutions, cash managers can fortify their company’s cash flow during a recession.
