My Turn: Lifting the Financial Fog

[From iSource Business, June/July 2002] With Internet and supply chain initiatives transforming many business processes, did someone forget about corporate finance? Procurement and manufacturing functions are reaping the benefits of widely available supply chain solutions that help manage inventory and control corporate spend, yet the need to apply similar technology to the settlement end of the supply chain is largely unmet. Outmoded paper-based processes characterize the financial settlement landscape, in stark contrast to the information clarity and efficiency demanded of today's global business environment.

For example, despite corporate mandates for e-business, over 95 percent of business transactions in the United States are settled with paper invoices and checks. For each transaction, a paper invoice is printed and sent via mail with the goal that roughly 30 days later a payment will be received accompanied by sufficient remittance information to properly apply the cash. 

What results for the accounts payable and accounts receivable organizations is a financial fog of limited information, manual processing and cumbersome exception management. On average the paper settlement cycle takes 40 to 75 days to complete, and up to 20 percent of transactions are burdened by costly exceptions or disputes. All participants in this financial supply chain, both buyers and sellers, incur the expense and friction of these inefficiencies.

Global Working Capital

But there's more to financial supply chain optimization than elimination of paper and lower administrative costs. Modern enterprises should be working toward the goal of optimizing global working capital. This concept goes beyond better management of working capital. It means doing more with less working capital to the benefit of an entire supply chain.

To fully appreciate this goal, buyers and sellers must look beyond today's zero-sum approach to settlement and recognize that the costs of working capital apply holistically across trading relationships. For example, additional carrying costs for the supplier are not necessarily a benefit to the buyer. The win-win for all parties would be to adopt collaborative settlement systems that shorten the settlement cycle and eliminate excess working capital.

The potential from optimizing the financial supply chain is larger than any one company's supply chain. According to Killen & Associates, settlement delays force Global 1000 companies to maintain hundreds of billions of dollars in excess working capital. Gartner Group estimates that administrative costs surrounding settlement run as high as $30 a transaction across roughly 40 billion U.S. B2B transactions each year.

New Approaches The Payment Services Network

While financial supply chain automation offers substantial business benefits, businesses have been slow to adopt such first-generation electronic payment solutions as financial electronic data interchange (FEDI) and the Automated Clearing House (ACH) system. These solutions enable funds transfers with only rudimentary remittance information exchange, and neither solution is supply chain oriented. As a result, these systems are complex and costly for individual entities to set up and maintain. In addition, they merely exchange information rather than automate the end-to-end settlement process.

Today, a new generation of collaborative settlement solutions is becoming available. Known as payment services networks, these solutions systematically manage the information associated with invoice processing and payment. By applying modern information logistics, these new solutions streamline processes and create the opportunity to settle more efficiently and in less time. Shortening the settlement cycle time makes it possible to eliminate excess working capital. Payment services networks also involve banks and other suppliers of credit, ultimately giving businesses a wider array of financing options at a lower cost.