The CCC of a firm is determined by how it requires time to sell products, collect accounts receivable, and pay invoices.
Fremont, CA: As interest rates rise, a well-managed accounts payable department may assist businesses in optimizing their cash conversion cycles and freeing up working capital.
When corporate finance professionals argue for automating business Accounts Payable (AP) processes, they frequently mention how automation lowers the cost of paying bills and decreases the number of paper checks generated.
Nevertheless, these discussions frequently neglect another significant aspect in which the digitalization of the AP function might benefit an organization's bottom line. It can, for example, increase a company's access to working cash. This is especially useful during periods of rising interest rates. These are some AP recommended practices that businesses use to attain these results:
• Expanding AP virtual credit card programs
An organization's cash conversion cycle (CCC) affects its access to working capital, which is the length of time it takes to turn an asset into cash. The CCC of a firm is determined by how it requires time to sell products, collect accounts receivable, and pay invoices.
Commerce Bank, for example, is now providing some clients a 30/15 payment period comparable to their business purchasing cards. In such circumstances, the bank pays suppliers on the agreed-upon conditions but only demands payments from the firm once per 30 days. The corporation then has 15 days to transfer the monies to the bank. This indicates that a company keeps its cash for a median of 30 days only after the supplier is paid. At that period, it can momentarily repurpose the funds to pay down a line of credit, support an outside investment, or produce profit before it is required to be spent on supplier expenses.
• Developing an integrated payment strategy that considers DPO
According to research, a 39percent of US and Canadian businesses are now utilizing virtual credit cards for business-to-business payments. While their popularity is expanding, they only work for some sources.
A successful payment plan acknowledges this and provides alternatives (such as ACH, cheques, and wire transfers) that match the demands of particular suppliers. A similar approach addresses how to proceed with making payments, evaluates the worth of early payment incentives individually, and provides a simplified method for delivering the most economic reward to a company's bottom line.
• Implementing a payment hub
When a company's Integrated Payable solution incorporates a payment center, it's working capital also benefits. A payment hub manages the whole payment process, from when an invoice is ready for payment until payment and reconciliation. It is the next natural step in the process of payment digitization.
