Improvements in working capital can be achieved by expanding AP virtual credit card programs and implementing a payment hub.
FREMONT, CA: Companies can optimize cash conversion cycles and free up working capital when interest rates rise with a strategically managed accounts payable function. Accounting professionals often emphasize how automating their Accounts Payable (AP) process reduces the cost of paying bills and reduces the number of paper checks written.
This discussion often overlooks another important way the digitization of the AP function can benefit an organization's bottom line. Specifically, it can improve a company's access to working capital. During periods of rising interest rates, this can be especially useful.
To achieve these results, companies follow these two AP best practices:
AP virtual credit card expansion: Cash conversion cycle (CCC), or the time it takes to convert an asset into cash, affects an organization's access to working capital. The CCC of a company is based on how long it takes to sell inventory, collect receivables, and pay its bills.
When an organization waits to pay its bills and thereby extends its DPO, it has more time to use the cash that will eventually fund its payments. As a result, businesses are able to maximize working capital and improve near-term liquidity by increasing DPO. One-time use of virtual credit cards allows organizations to extend payment terms by up to 30 days while earning additional revenue. Commerce Bank is now offering some customers a 30/15 payment cycle, similar to that of their corporate purchasing cards. The bank pays suppliers according to the agreed-upon terms but only requests funds from the company every 30 days. After that, the company has 15 additional days to remit the funds.
It means that businesses hold onto their cash for an average of 30 days after suppliers pay them. The company can temporarily repurpose that cash to pay down a line of credit, fund an outside investment, or otherwise generate profit before it must be spent on supplier expenses.
This is in contrast to ACH and paper check payments, which typically have floats ranging from two to five days.
The implementation of a payment hub: An Integrated Payable solution that includes a payment hub can also benefit working capital. From the moment an invoice is ready for payment to payment and reconciliation, a payment hub manages the entire payment process. In the process of digitizing payments, this is the next logical step.
It is necessary to consider the fragmented payment processes they replace in order to appreciate the benefits of a payment hub. There are still many companies that process checks, ACH, virtual cards, and other electronic payment methods separately. Through acquisitions, their payment processes become even more complex and difficult to manage.
As a result of a payment hub, a company can not only streamline these efforts but also control and optimize payment methods.
In addition to extending DPO, payment hubs can improve cash management by reducing the number of paper checks processed.
