Editor’s Note: With summer in full swing, many of the practitioners in the accounts payable world are taking vacations ahead of the crush of the fall months. In honor of that, the team here at Payables Place is continuing its “Summer Rewind” series with some of our favorite posts from roughly a year ago. Today, we are re-running our article on how AP automation can help small and midsized businesses with cash management, which originally ran in January 2015.
Cash management is a critical function in any enterprise, no matter the size. If cash isn’t managed effectively, the enterprise risks running low on operating funds, which could result in staff and/or bills going unpaid or lenders calling their loans ahead of schedule (because certain financial liquidity thresholds are crossed) — among other financial consequences. Nowhere is this more true than for small and mid-sized businesses, many of which operate on tight cash flow as it is.
Over the short and mid-term, how a company manages its cash inflow and outflow can be vital to its ability to grow and/or make payroll. In the long-run, a more strategic approach to cash management can help to better identify cash flow trends, understand areas of the business that generate or drain cash, negotiate better payment terms, and ultimately develop a more financially attractive business.
Managing Cash: It isn’t Always Easy
The economic conditions over the past few years have made access to cash and credit more difficult for SMBs, making cash management an even more important aspect of operating an SMB. For these reasons, access to accurate data around payables and receivables and establishing key cash flow metrics (such as “days sales outstanding” and “days payable outstanding”) are crucial steps to gaining more control and transparency into cash flow and enabling the SMB to better track and analyze cash positions.
For example, if an SMB is paying its invoices faster than it collects receivables, there’s a potential cash flow issue. Without the right level of visibility and control, the discovery of cash flow issues may occur too late, placing undue risk on the business. Most SMBs today aren’t positioned to strategically manage cash flow–mainly because their key processes, like accounts payable, are manually driven, making it extremely difficult to collect, analyze, and access timely and accurate data. Paper-based AP processes are also the cause of a higher level of overpayments, duplicate payments, penalties, and various other errors that many SMBs simply cannot afford if they want to operate a financially agile business.
How AP Automation Can Help
AP automation (“ePayables”) solutions provide the ability to transform a manual environment into an automated, more efficient one by removing paper from the process and automating many of the basic AP functions (e.g., data entry, validation and approval/review). Through the deployment of a cloud-based ePayables solution that can automate the entire AP process (from invoice receipt to processing and payment) SMBs can better evaluate current cash positions and forecast how much will be required on-hand to meet current expenses.
The understanding of current and future cash flow can also help SMB executives make key financing decisions and better plan and fund investments that will help support and grow the business. Furthermore, automation in AP can result in direct bottom line improvements due to the increased opportunity to capture early payment discounts and strengthen relationships with vendors. However, these more strategic activities can only be carried out if there is efficiency and visibility across the entire AP process.
Final Thoughts
When it comes right down to it, managing cash is a critical function in every enterprise. SMBs have a different situation than their larger peers, in that many run on tighter cash flows and must make cash management an even higher priority to ensure they can continue operations. Keeping a tight reign on the cash situation is critical in the SMB space, and AP automation can help with that.
Check out these related articles for more information:
An Early Payment Discount Example to Sink Your Teeth Into
How Virtual Payment Cards Can Help Optimize Working Capital
Three Technologies that Speed Access to Working Capital
