Peeling Back the Digital Payments “Onion” is Critical to Maximizing Cash Flow

By Corcentric | March 4, 2022

Originally appeared in PYMNTS.com

“At a certain point in the evolution of any business,” Corcentric President and Chief Operating Officer Matt Clark mused, “digitization becomes necessary.”

The pandemic has hastened any number of corporate evolutions, forcing them to embrace at least some modernization of back-end processes. However, there are still pockets of operations — particularly with procurement or accounts payable (AP) — where there remains room for improvement, and by extension, better visibility into cash flows.

Peel back the onion a bit, and it becomes apparent that many companies are not as digitally savvy as they appear to be — certainly not when it comes to payments. The conversation came against a backdrop in which 21% of the chief operating officers at the largest companies said they aren’t digitizing their payments because they already have robust systems in place.

As Clark noted: “One person’s ‘digital’ is not the same thing as another person’s ‘digital.’”

To be sure, he said, it’s possible to get to at least some level of scale, doing things the old-fashioned way by relying on manual activities and even paper-based purchase orders, invoices and checks. In some cases, there can be some exaggeration in the mix, where executives might claim they are more forward-thinking along the tech curve than they actually are.

Smaller firms in particular are realizing the advantages of digitization, where 70% of smaller companies recognize the benefits. No firm is too small to make the digital leap, maintained Clark, especially resource-constrained outfits that then can reassign staff to high-value tasks.

The New Challenges

No matter a company’s size, volume and complexity, new markets present waves of challenges, Clark said. Those firms then must grapple with the pain points that are extant in their own day-to-day operations, and where digital initiatives have come up short.

There’s a growing recognition that those points of inefficiency need to be addressed sooner rather than later. More than six in 10 chief financial officers (CFOs) surveyed have said that working capital is an extremely important factor in maintaining healthy balance sheets. And the right procurement strategy ultimately leads to a better payments and cash flow impact on that same firm’s back end.

But in digging a bit deeper, cash conversion cycles are very much influenced on both sides of the equation — namely the AP and accounts receivable (AP) activities on the part of buyers and sellers. As Clark said, when one examines AP, they seek to optimize days payable; when focused on AR, it’s all about days sales outstanding (DSO).

In a nondigital world, with a high incidence of paper checks in and paper checks out, 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 in which a firm has 60-day payment terms with a vendor. The company that pays that vendor in 45 days is giving up at least some of its own cash flow to that vendor — perhaps even unnecessarily. Conversely, being paid on day 75 of a 60-day term means that the recipient is losing 15 days of cash flow.

It’s becoming an advantage to connect digital payments and a payments strategy to the things that happen “upstream,” Clark said. Companies must endeavor to make sure that their bill distribution channels are the best they can be, minimizing exceptions and disputes that can lead to extended DSOs.

“A holistic, 360-degree view is what drives the advantages of freeing up working capital,” he said.

This has positive ripple effects, he added, especially in an inflationary environment where firms do not have to tap the capital markets.

Clark told PYMNTS that firms of all sizes benefit from the anti-fraud advantages that come with digitization. Fraud has moved up the list in terms of corporate prioritization and can help with digital record keeping, verification and authentication of entities with which a firm transacts.

If there is better transparency in the mix, then problems tend to stick out a bit more, and executives should be aware of what needs to be addressed, he said.

“A red flag that has been tripped here gets us to the right scenario, the examination of the vendor, the steps that need to be taken to be sure that fraud is not taking place,” Clark said.


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