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Fund Management: Identifying Supply Chain Impacts of Unpaid Invoices

When it comes to business, cash flow is of utmost concern and it’s critical for companies to be able to access funds as needed. Yet, managing receivables and payments can often be a delicate balancing act. In today’s interconnected business environment, the way one company addresses this balance can have significant ramifications and impact on its business partners. When a company delays or misses payments, it can cause repercussions for its suppliers, partners and others across the supply chain. Finance executives noted that 15 percent of invoices remain unpaid past their payment terms even though two-thirds of them recognize the problems that late payments cause for their suppliers, according to Basware’s 2012 “Cost of Control: Disrupted Networks” report. And 38 percent of finance executives acknowledge that their late or erroneous payments to suppliers impact the suppliers’ commercial performance to the same degree as it would their own business.

For many businesses, working capital is tied up in receivables and supply chain processes—and can’t be easily accessed when needed. And while some companies leveraged invoice payments by changing invoice terms or delaying payment to improve their balance sheets, this game can be problematic and moves the problem down the line when it becomes difficult for companies to collect payments owed from a business that is in trouble.

Compounding this problem is the difficulty many companies have in knowing what outstanding invoices or liabilities they have. Unless there is an automated system for capturing invoices, it is easy for invoices to become lost, misplaced or late. In many businesses, as much as 50 percent or more of purchasing is indirect or maverick spend without corresponding purchase orders. If there are no purchase orders (PO’s) for particular goods or services, finance most likely is not aware of the outstanding liability until it shows up on their doorstep. When you consider the interconnections between finance systems both internally and externally across the supply chain, these visibility problems worsen.

The process of managing cash flow requires finance departments to have a close view of each part of the business and their interactions with external organizations. And 59 percent of finance departments think decisions have been made within their business to improve financial operations without a clear understanding of the wider implications on cash flow visibility, according to Basware’s 2011 “Cost of Control: Fuzzy Finance” report.

Increasing visibility equals better cash flow management

According to the “Fuzzy Finance” report, 71 percent of global chief financial officers and finance directors are concerned that greater levels of reliance between different finance systems present cash flow visibility challenges. Subsequently, 48 percent of CFOs realize that cost savings across the business is the most significant challenge facing their departments—and this trend is set to continue in 2012.  

Managing cash flow requires a skilled finance department with a true understanding of how the business operates. In addition to skilled financial experts, technology can assist finance departments in better managing cash flow. According to the 2011 research, 68 percent of businesses think greater levels of e-invoicing and payment automation would improve cash flow visibility for their organizations and 62 percent agree inefficient accounts payable (AP) practices compromise cash flow visibility.

Automation within areas such as AP, Accounts Receivable (AR) and e-invoicing have become increasingly vital for finance executives to access detailed information on company cash flow on a real-time basis. It also regulates the flow of cash in and out of the organization while improving confidence in cash flow forecasts. According to the 2011 Basware report, leveraging

e-invoicing technology was ranked as the top activity that 52 percent of businesses are more likely to do now than 12 months ago.

In fact, the U.S. government has become a proponent of e-invoicing. Just last year, the U.S. Department of the Treasury announced that by the end of this fiscal year, all Treasury Bureaus will implement an electronic invoice processing solution as part of President Obama’s “Campaign to Cut Waste,” to improve government efficiency and cut costs for taxpayers.

The U.S. government and many businesses recognize that by being more closely integrated with trading partners (e.g., customers and suppliers) through the adoption of e-invoicing and business-to-business networks, they can add a further layer of visibility into cash flow and more accurately forecast shorter-term cash flow.

While it’s true that within an organization—and even government—cash is king, the obstruction of cash flow can cause significant problems that ripple throughout the supply chain. Making cash flow visibility a priority and automating key financial processes are critical to helping companies maintain healthy cash flow and access to their funds, which are vital in both tough and prosperous economic times.

Bob Cohen is Vice President, North America for Basware, a provider of software solutions that automate the purchase-to-pay process for enterprises around the world.

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