E-Invoicing: The Key to Supply Chain Financing

The recession may have ended over two years ago — at least in the eyes of the National Bureau of Economic Research, a non-profit group that is considered the official arbiter of such things — but CFOs are focusing on working capital management as never before. Some 84 percent of businesses surveyed by Aberdeen Group say they have increased their focus on cash managemen

In the crosshairs of cash management is the financial supply chain — the flow of money that supports the movement of products. Many suppliers, particularly small and medium-sized companies, are struggling to access capital to run their businesses; funding remains scarce and expensive. Meantime, buyers increasingly are looking for ways to secure longer payment terms (improve their Days Payables Outstanding or DPO) and lower their cost of goods; some 84 percent of accounts payable practitioners polled by PayStream Advisors in 2012 indicated that capturing early payment discounts is important to them.

Against this backdrop, it's no surprise that there's been so much talk about supply chain financing.

According to a 2011 survey by Aberdeen Group, two pressures are driving companies to focus on supply chain financing: demand volatility's impact on available cash (identified by 46 percent of companies that responded to the survey), and the risk of trading partner default (33 percent), which impacts the value of accounts receivable with an increase in the allowance for doubtful accounts.

Supply chain financing provides financing and payment options that are negotiated to improve each trading partner's financial position. Reaching far beyond the finance department, supply chain financing can impact procurement, sales, shipping and more. To be sure, supply chain financing helps suppliers receive funds quickly at a discounted rate. But it also enables buyers to stretch their payment cycles, and capture more early payment discounts. The potential rewards of these discounts can add up fast. Even the standard discount of 2 percent for payment within 10 days translates to an annual percentage rate of 36 percent; with today's interest rates, that's far more than a buyer could expect to earn from a money market account or even from paying down debt. The facilitating intermediary (e.g. a bank) profits by receiving full payment at the end of the maturity term.

A Missed Opportunity
Extending DPO for the buyer, without creating an equivalent shortage of cash for the supplier, is clearly a "win-win" situation, as long as the gains are not offset by price increases on the buy-side.

So why hasn't supply chain financing been more widely adopted? And why are only 27 percent of companies surveyed by PayStream Advisors able to consistently capture early payment discounts?

The biggest culprit is corporate America's dependence on paper. Most payables departments still rely on manual and inefficient invoice processes and decentralized receipt of transaction-related documents. This results in lengthy approval and payment cycles — ranging from 15 to 40 days, or even more in some cases — and adds up to four percent to the cost of goods, according to PayStream Advisors.

Making invoice processes electronic not only eliminates friction traditionally associated with paper, it also helps facilitate supply chain financing. Here's how it works: Buyers electronically receive and route supplier invoices. Once a supplier invoice is approved, its status is updated online. Suppliers can then choose either to wait for full payment or to sell the invoice to a facilitating intermediary, such as a bank. If the invoice is sold, the supplier can receive cash as soon as the next day.

Facilitating Discounts
While supply chain financing doesn't require e-invoicing (or participation in a supplier invoicing network), the technology is critical to a company's ability to capture more early payment discounts.

A 2011 study by Aberdeen Group found that enterprises using supplier networks as part of their supply chain financing initiatives reported greater year-over-year increases in the number of partners with which they have discounting and financing arrangements than those not utilizing supplier networks. The increase in financing arrangements among enterprises using supplier networks was 1.5 times the level of others, while the increase in discounting arrangements was 4.5 times higher.

E-invoicing enables buyers to complete their invoice approval cycles farther ahead of final maturity dates, providing greater control over the timing (and potential financing) of supplier payments.

Companies that use electronic invoice receipt and workflow technologies report processing times 18 percent faster than those that depend on paper processes, according to Aberdeen Group. PayStream Advisors finds that the diligent use of electronic invoicing and automated matching and workflow enables companies to slash the invoice receipt-to-pay cycle from an average of 23 days to five days.

Faster approvals opens the door to more opportunities to explore alternative payment arrangements (such as supply chain financing), or to lengthen payment cycles by renegotiating terms with suppliers. E-invoicing also allows for the financing of more common (high frequency, lower value) transactions; traditionally, supply chain financing has focused on large, less frequent transactions.

What's more, e-invoicing platforms provide trading partners greater visibility into the financing process.

Aberdeen Group reports that best-in-class companies are 83 percent more likely to have online visibility into financial supply chain events such as purchase order submission or invoice approval.

With e-invoicing, suppliers can access real-time invoice status updates, gaining greater predictability of when they can expect to receive payment. Suppliers will know, for instance, if an invoice is blocked for payment or if it hasn't been entered for some reason. This visibility enables suppliers to better plan for their cash needs, and gives them peace of mind to extend payment terms more readily. Similarly, e-invoicing offers larger amounts of financial information for analysis, assisting with financing decisions. And e-invoicing electronically manages all of the financing information between the parties, and facilitates real-time messaging for streamlined communications. Moreover, e-invoicing offers robust collaboration tools to facilitate the exchange of documents between trading partners and to expose these transactions to potential financing intermediaries. And an e-invoicing platform facilitates multiple payment alternatives, including early payment discounting, dynamic discounting, and factoring of receivables either guaranteed by the buyer or not.

The lure of supply chain financing also gives suppliers another reason to migrate to e-invoicing from paper processes; greater adoption strengthens a buyer's e-invoicing business case for the technology.

The Bottom Line
In today's economic environment, supply chain financing is a "win-win" for buyers and sellers.

It's an opportunity for buyers to capture more early payment discounts, in turn, earning a far greater return than what's available in money markets. Supply chain financing also can provide buyers with better terms and a more stable vendor base. For suppliers, supply chain financing provides cheaper access to capital as well as greater certainty about when they will get paid (which is especially important for smaller suppliers) — both critical factors to ensuring a company's financial stability.

But without an e-invoicing platform — and the improved cycle times, visibility and control it provides — buyers and sellers may find the benefits of supply chain financing remain out of reach.