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Your Desire to Better Manage Cash May Ultimately Overcome Automation Reluctance

Old way to new way knob

Automating finance processes can lead to a variety of benefits: greater operational efficiency, lower costs, and streamlined invoice approval are typically enough to justify purchasing a new solution. However, what may ultimately drive those reluctant to invest in automation may be a desire to better manage cash.

Here’s why: Cash management is a key benefit of automated workflow, including electronic invoicing, and procure-to-payment solutions. These tools give organizations greater control over when disbursements are made, allowing them to pay invoices strategically and maximize cash flow. Better cash management results in improved days payable outstanding (DPO), reduced late fees, and more captured early payment discounts.

Taking Control of DPO

Beginning a cash management program involves a fundamental shift in the payables process. Rather than paying invoices whenever they can, companies can start paying invoices when they should.

Part of the cash conversion cycle, DPO is the amount of time between AP receiving an invoice and the time it is paid. Traditionally businesses want to stretch their DPO as far as possible to keep as much cash on hand before paying their bills.

Stretching DPO in a paper world can be risky due to its unpredictability. Paper invoices are paid once they have been routed manually for approvals. David Hay, former director of shared services for Hewlett-Packard, states that it takes between 20 and 45 days for the average paper invoice to be approved.

Such a long turnaround time causes businesses to focus on simply keeping up with due dates rather than paying strategically. Attempting to stretch payment terms in a paper environment could lead to late payments and related fees.

The problem is worse for businesses that do not require suppliers to send paper invoices directly to AP. When suppliers send invoices to the original purchaser, Hay says it leads to numerous lost or unpaid invoices. “Between 7.5 and 8 percent of invoices sent to the business units end up being lost,” Hay says.

Automation technologies such as automated workflow and e-invoicing allow buyers to reduce invoice turnover time and bring their DPO under control.

Workflow

Whether received on paper or electronically, an automated workflow system is integral in getting invoices approved quickly enough to decide if it should be paid strategically. Paper invoices are scanned and saved as electronic files that can be automatically approved for payment or routed electronically to approvers.

Automatically approving invoices drastically reduces turnover time.

Automated workflow helps businesses control DPO. Improved invoice turnover does not mean companies should pay all their invoices before the due date. Instead, they should determine the most effective time to pay. They may withhold payment until the due date in order to maximize cash-on-hand and build interest or they may pay early to take advantage of discounts. Automated workflow gives them a choice.

E-Invoicing

While workflow automation alone gives companies greater control over DPO than manual processing, add e-invoicing into the equation and that control becomes tighter. With electronic invoicing, businesses no longer must wait for invoices to be scanned and indexed before they can be matched and paid. They can be loaded into a buyer’s Enterprise Resource Planning or workflow system the same day they are issued by the supplier.

Once electronic invoicing and automated workflow have been combined, invoice processing time drops from weeks to days. The average time to approve an electronic invoice for payment is one to three days.

Automated workflow and e-invoicing give businesses more control over when invoices are paid. Choosing to delay payment can keep more cash on hand, improve the cash conversion cycle, and earn interest, while paying early can sometimes save money with early payment discounts.

Digging for Discounts

Controlling when an invoice is paid opens up a variety of opportunities for effective cash management. One of the most potentially beneficial is the ability to capture early payment discounts.

Chris Rauen, JPMorgan Xign’s corporate marketing manager, says a significant portion of their communication with potential clients is spent describing the benefits invoice discounts have on cash management. “One of the areas of focus for us is to educate treasury as to what is the best method to use their cash,” he says.

The most common discount term suppliers offer is 2/10 Net 30, meaning buyers receive a two percent discount if they pay within the first ten days of a 30-day payment term. According to Rauen, when annualized this discount translates into a 36 percent return on cash, which is a considerably larger return than most short-term investments such as money market accounts.

“Invoice discounts are really a transformational business process when done right,” Rauen says. “It does more than just improve a business process. It actually has an impact on how [businesses] apply their cash and working capital and the earnings that can be gained from that.”

Implementing a Discount Program

Discount management involves more than simply paying invoices early. Businesses must also have the capacity to negotiate terms with their suppliers (and, on occasion, propose them), and use a payment method fast enough to capture discounts. Solution providers often provide these services for buyers.

Supplier Enrollment and Discount Negotiation

Although receiving invoice discounts from suppliers is an ideal way to better manage cash, the ability to approve and pay invoices on time is irrelevant if suppliers are not offering discounts. Realizing this, e-invoicing and P2P solution providers often assist their clients in initiating a discount program.

Aside from communicating discount terms when enrolling suppliers, solution providers can also create a web portal or an interface within the P2P system that allows buyers and suppliers to propose one-time and ongoing discounts. (See Discounting Turns Dynamic).

Funding the Program

Beginning a discount management plan can be a financial jolt. Companies that are accustomed to operating on payment float may be hesitant to paying vendors early, as that reduces their cash-on-hand.

Many companies will extend payment terms with vendors that continue to send paper invoices from 30 days to 45. Paying those vendors 15 days later frees up cash that can be used to pay other vendors early, all while prompting paper-based vendors to go electronic.

However, buyers may want to be cautious about extending payment terms with vendors, as doing so may damage the relationship. Any changes to payment terms should be negotiated with suppliers beforehand.

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Cash Management Forum by CMLI

March 18-19, 2025

Austin, TX

Join us for two days of 1-to-1 meetings with solution providers, peer-to-peer networking and conference sessions led by experts.

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