From the February 2017 Special Report issue of Treasury & Risk magazine

The Tech Angle on Working Capital

There are plenty of pain points when it comes to improving payables and receivables processes, but technology can help solve them.

With U.S. interest rates rising, companies are expected to pay more attention to wringing the most cash possible out of receivables and payables. As they do, technologies ranging from electronic invoicing to integrated receivables are expected to smooth the way.

Working capital metrics have deteriorated in recent years, according to The Hackett Group, which produces an annual benchmarking study based on financial statements of the 1,000 largest U.S. publicly traded nonfinancial companies.

The most recent Hackett report, released in July, showed days sales outstanding—the amount of time it takes companies to collect receivables, also known as DSO—stood at 36.7 days in 2015, up from 36.3 days in 2014. Days inventories outstanding, or DIO, stood at 49.1 days, up from 44.5 days.

The average cash conversion cycle—the time it takes companies to turn their spending on overhead, goods, and labor into cash—came in at 35.6 days in 2015, the worst performance since the 2008 financial crisis.

The report blames the deterioration in working capital metrics on low U.S. interest rates and companies’ ready access to cash, noting that the 1,000 large companies had borrowed $413 billion in 2015, boosting their overall indebtedness by 9.3%. Since 2008, the companies more than doubled the total debt they have outstanding, according to the Hackett report.

Experts cited other problems that dog working capital efforts in addition to the reliance on credit.

Amy Fong, practice leader of the purchase-to-pay advisory program at The Hackett Group, said corporate payables processes are hampered by “a lack of purpose [and] a lack of automation and process control.” Many organizations still rely on manual processes and are focused on making those processes move quickly and efficiently, rather than considering “better payment terms or holding payments to the right timing,” Fong said.

On the receivables side, Veronica Wills, Hackett’s U.S. working capital practice leader, noted that one of the lingering effects of the 2008 recession was an effort by many companies to extend the time they take to pay their suppliers. But extending terms comes at the expense of the suppliers’ cash flow, Wills noted. “For a company with a number of customers that are doing that kind of payment-terms extension, obviously that’s a huge impact,” she said.

Others note the proliferation of payment methods as a factor for accounts receivable teams.

Companies want to provide as many payment options to their customers as possible, said Lawrence Buettner, senior vice president of innovation at Wausau Financial Systems, a Deluxe® company, which provides payments and receivables processing solutions. “I’ve seen companies that have seven or eight different [payment] channels.”

That means companies have to deal with the interfaces for many different payment types, Buettner said. Moreover, “you’ve got an environment where we seem to be inventing new payment types every six to 12 months.”

“The types of payments that can come in, especially in cyberspace, are constantly growing,” agreed Nancy Atkinson, a senior analyst at Aite Group. “That definitely adds challenges for companies to be able to pull that all together and know that they have the right numbers for their working capital management.”

These challenges for companies are occurring amid a changing U.S. political and economic environment, points out Tom Roberts, senior vice president for global marketing at PrimeRevenue.

“Change is definitely coming, and with change comes uncertainty,” Roberts said. That makes it even more important for companies to have a cash cushion, he said, and concern about a company’s cash cushion “gets turbocharged, in our view, if interest rates rise. We expect those two dynamics to put more focus on working capital.”


Lawrence Buettner, Senior Vice President - Innovation, WAUSAU Financial Systems



 

We think there’s a big opportunity to rethink
the receivables process to recapture
some of that lost working capital.

—Lawrence Buettner, Wausau Financial Systems

 

 

 

Receivables

Wills pointed to a number of different types of software that can help companies on the receivables side, including e-invoicing.

“One of the key variables for billing is how quickly you can bill and how accurate the billing is,” she said. “The more automated, less room for errors.” Wills cited a “pretty low” use of e-invoicing among the companies Hackett works with, pointing out that if companies sell to smaller businesses, those firms might not be able or willing to deal with electronic invoices.

Most companies have automated the application of payments, she said, noting that the software involved is inexpensive. “Rather than having an individual receiving payment files and applying them to invoices in the system, you would just have the payment file imported into the cash application software,” Wills said. After the software uses algorithms to match as many payments as it can with invoices, employees can handle the exceptions.

Wills also cited software that can handle retail deductions, which are the amounts that retailers deduct from their payments for their promotional expenses. Reconciling retailers’ payments that involve such deductions “can be a very, very time-intensive process that is prone to errors,” she said.

Companies can also use software to deal with issues that prevent customers from paying invoices, which could range from pricing errors to having been shipped too many goods or not enough goods, Wills said. She noted that many companies handle such issues manually rather than relying on technology. But software can provide a workflow around the process and provide companies with statistics on the types of issues they’re seeing and how they’re affecting cash, she said.

 

Integrated Receivables

Another type of solution, termed “integrated receivables,” enables a company to receive the information on all of its payments, no matter what type, at a single site and process them.

Integrated receivables started out as files that banks provided to their customers that included all of a company’s payments of all different types, said Wausau’s Buettner. Over time, the original solution has evolved into a more robust array of services, he said. “Today you’ll see products in the market that help with exception processing and increasing straight-through processing.”

Integrated receivables solutions also help match payments with invoices, a more pressing problem as the move to digital payments splits more payments from remittance details. Companies are making ACH payments but don’t want to pay the extra fee to send all the information with the payment, Buettner said. Instead, they send their suppliers an email with a spreadsheet or a PDF or text giving them the details.

“What that results in is when the cash application department of a company sees the incoming money, they now have to go chase to find out where the detail is,” he said. “Not only do they have to find it, they have to key it back into their ERP system.”

Integrated receivables solutions can extract the information from those emails from customers and aggregate it, he said. “Then once you pull the data together, [integrated receivables] products are giving the corporate customers a better perspective on how to manage their receivables.”

These days, companies can access integrated receivables as a service that’s provided by their banks or as a service or software platform provided by a vendor. Buettner said that companies with multiple banking relationships may prefer to use a solution that lets them gather the data within their own four walls.

Integrated receivables solutions can also come in handy when a company has done a number of acquisitions and is dealing with a number of legacy ERP systems, he said. “You can front-end that whole process with an integrated receivables solution, which then allows the company to centralize their receivables regardless of which ERP system the data is going to.”

He cited statistics putting the average U.S. company’s DSO anywhere from 45 to 52 days. “So you’re extending terms to 30, but you’re getting paid at 52,” he said. “We think there’s a big opportunity to rethink the receivables process to recapture some of that lost working capital.”

Improving a company’s receivables processes also provides operational efficiencies, he said, and it can give a boost to customer satisfaction.

JD Power research shows a close connection between a company’s receivables processes and customer satisfaction, Buettner said. He cited the example of a customer service representative who has to check multiple ERP systems to respond to a customer query about a bill. “If you’ve got to fumble to find out which system that customer was billed out of, it reduces the satisfaction that customer has,” he said.

 
Craig Jeffery, Strategic Treasurer



Getting an invoice out early has a huge
impact. Getting it out accurately has
an even bigger impact.

—Craig Jeffery, Strategic Treasurer

 

 

 

 

 

Exceptions

Craig Jeffery, managing partner at consultancy Strategic Treasurer, argued that exceptions play a key role in working capital management. “Exceptions kill working capital,” he said. “They waste tons of time, they’re inefficient, but exceptions also mean you don’t get paid on time.”

He argued that companies should put more emphasis on accuracy than speed. “Speed matters,” he said. “Getting an invoice out early has a huge impact. Getting it out accurately has an even bigger impact, on reducing your DSO for example.”

Aite Group’s Atkinson sees promise in software that would automatically process exceptions that are within certain parameters the company has approved.

“Instead of tracking down $500 on a $1 million invoice, accept it and move on,” she said, adding that the decision might hinge on the identity of the customer making the payment with a discrepancy. “If it’s a customer that buys every month, a concession of $500 one month probably doesn’t matter,” she said. “If it’s somebody that buys from you every blue moon, you may not be willing to take that.”

 

Payments

While the Hackett statistics showed a deterioration in DSO and DIO, days payables outstanding (DPO) actually improved, rising from 47.7 days in 2014 to 50.1 days in 2015.

Making payments “is the one area that is most within the control of the organization,” said Hackett’s Wills. “On the receivables side, once you’ve submitted your invoice, you’re at the will of the customer to pay it. Go to payables; you can decide to not pay a supplier.”

In fact, a 2016 survey by Strategic Treasurer showed that 58% of respondents’ companies delay payments as a way of managing their liquidity: Four percent said that they always delay payments, while 8% said they do it often and 46% do it sometimes.

Jeffery described delaying payments as the easiest way for companies to improve their funding in the short term.

Postponing payments can be hard on a company’s suppliers, though, especially if the suppliers are small businesses. Over the last 10 years, companies have turned to supply chain finance and dynamic discounting to bolster their suppliers’ cash flow while at the same time improving their own DSO.

In supply chain finance, a buyer offers financing, usually provided by a bank or other third party, that lets its suppliers receive payments earlier than they would have otherwise, while the buyer still gets extended terms. Such financing usually leverages the buyer’s credit rating. In dynamic discounting, the buyer offers its suppliers the option of accessing payments early in exchange for a discount.

But those solutions themselves rely on technology, Atkinson said. “For instance, electronic invoicing is very critical to be able to even do the matching between the payer and the receiver and allow the two parties to negotiate over receiving payment earlier.”

“The base level of automation of your A/P process is really an enabler for more sophisticated tools around working capital, things like using dynamic discounting [and] supply chain finance,” said Hackett’s Fong.  Automating the invoice process “enables the ability to send invoices electronically but also to view them electronically and take the opportunity for supply chain finance or dynamic discounting,” she said.

Hackett’s survey shows companies are still lagging when it comes to invoice automation, though, Fong said. “A lot of companies have that kind of electronic solution, but the typical companies out there only have about 20% or 30% of invoices coming in electronically.

“If you’re only seeing 20% of invoices electronically, you’re handling the bulk of your work on paper,” she said. “That’s a little limiting.”

On the other hand, companies that Hackett regards as leaders—those whose working capital performance is in the top quartile for their industry—have about 70% of their invoices coming in electronically, Fong said.

“We do see a very high correlation of use of technology with better outcomes and performance,” she said, adding that the companies that use technology are more likely to be using methods like dynamic discounting or supply chain finance.

Fong said, though, that such tools are still not commonplace. Among companies that Hackett regards as leaders in procure-to-pay, about a third use some type of supply chain finance, but that drops to just 13% of average companies, she said.

 

Supply Chain Networks

Another approach to automating supply chain finance is to use a platform that handles the arrangements between the buyer and seller. Companies providing such platforms include C2FO, Taulia, and PrimeRevenue, Atkinson said.

PrimeRevenue’s Roberts said supply chain finance can be a handy tool for any company that needs capital to respond to a changing business environment or grow its business by making an acquisition.

He noted, as an example, that companies in the packaged foods industry have come under pressure in recent years as consumers put more emphasis on healthier eating and organic foods. The goods sold in the middle of the grocery store, “the packaged foods and canned goods, those are kind of hurting,” Roberts said.

Statistics for 11 large global packaged food manufacturers show the companies pushed their payment terms from an average of 28 days in 2007 out to 51 days in 2015, he said. Yet data on 20 companies that are suppliers to the big packaged food companies shows their DSO remained around 41 days, suggesting the packaged food manufacturers mitigated the effects of extending their payment terms by making supply chain finance available to suppliers.

“So when you have these major companies moving out their payment terms to generate cash, supply chain finance is helping keep those DSOs [stable] for a large set of suppliers,” Roberts said. “Supply chain finance gives you access to enormous amounts of cash to reinvest back in the business.”

Supply chain finance platforms offer benefits to suppliers as well. “The way the solution works, suppliers see exactly when an invoice is approved,” Roberts said. “Then you can make decisions as a supplier—you can make choices about whether you want to advance those receivables or say, ‘I don’t need [the cash] this month, I’ll let it ride to whatever the term is.’ That’s a real visibility benefit.”

Roberts argued that companies should pay attention to what their peers are doing in terms of working capital management. “If people are moving out their terms a few days every year and you’re paying quickly, you’re funding your competitors,” he said.

 
Nancy Atkinson, Aite Group




The types of payments that can come in,
especially in cyberspace, are constantly
growing. That definitely adds challenges
for companies.

—Nancy Atkinson, Aite Group





Keys to Success

Aite Group’s Atkinson noted that companies can have hundreds of bank accounts at many different banks in many countries. When they’re adopting new technology, “they have to look at the deployment in terms of: Can it be used globally, in any location?” she said. “Will it do what it needs to do, and can it be adapted to the requirements of any country? Countries use different standards, different formats—that’s another one of the challenges.”

She also warned against automating a company’s internal processes without first assessing the efficiency of those processes.

“Smart companies will not just automate what they do today, they’ll figure out the best way to do those processes and then automate that,” Atkinson said. “It can’t just be, ‘This is the way we’ve always done it, so we’ll automate that and everybody will be happy.’ Not necessarily.”

 

 

 

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