Shorten the Cash Conversion Cycle with Paperless ERP

Streamline the AP/AR process in your supply chain and stay ahead of the competition

Retailers are accustomed to all sorts of cycles that impact their businesses. The sales cycle, which reflects the length of time from first contact with a prospect to a sale, is a crucial measurement of marketing effectiveness. Seasonal cycles anticipate the schedule for ordering and rotating stock throughout the year. Macroeconomic cycles expose businesses to periods of struggle or prosperity.

Yet, managers may be less familiar with another critical cycle: the cash conversion cycle, or CCC, which gauges the efficiency of a company’s cash management and often is a predictor of the performance of the retailer’s stock returns.

Efficiencies in CCC

The CCC measures the amount of time that cash is tied up in working capital. More specifically, it is the time between a company’s spending cash and receiving cash for each sale. It follows cash through an organization, beginning as inventory, transitioning to accounts payable, moving through sales and accounts receivable and then back into additional cash for the company. In the operating cycle, the CCC is the interval between the time when the company disburses cash to its suppliers (removing its debt to suppliers and decreasing cash flow by a given amount) and collects a given amount of cash from its customers (removing credit from customers and decreasing accounts receivable by that amount).

Investors use the CCC in conjunction with other measurements (e.g., days in inventory), to determine the overall health of a company and the competency of its inventory management, accounts receivable (AR) and accounts payable (AP) departments. It is an important gauge of efficiency.

While the cash conversion cycle is also impacted by investment and finance activities of the company, clearly an organization will want to shorten (lower) the CCC so that it can obtain the cash for its investment in inventory more quickly. An efficient CCC allows a business to remain ahead of competitors; to showcase a healthy company for potential customers and investors; and to spend more time on business-growth activities like sales and marketing.

Obtaining these kinds of efficiencies, however, proves difficult for some organizations, especially those AR/AP departments that still must deal with literal paperwork instead of digital purchasing and payment documentation. Many suppliers receive paper purchase orders (PO’s) and submit paper invoices. These documents must be managed by human hands and are subject to a wide array of errors and delays, from faulty manual entry of purchase and sales data into a digital system to invoices simply becoming buried in someone’s inbox while that individual tends to other business.

Most enterprises have some sort of ERP platform within their organization but the majority has not yet integrated that technology with available document management systems that digitally scan, store and retrieve all the paperwork associated with a purchase or sale.

Paperless ERP enablement

Paperless ERP also enables much, or all, of the AR/AP routine to be automated, both internally within the department and externally between the company and its supply and demand chain.

A paperless ERP solution can contribute to a more efficient cash conversion cycle in many ways.

First, it automatically captures and manages data and enables access to that data more quickly. When the organization uses Web-based technology to furnish a portal to suppliers, those vendors can submit their invoices directly to their customers electronically. The system can then update accounts receivable and payable automatically and route the correct digital documentation through workflow steps to the next person who needs to respond to it.

Second, the company saves time and money by eliminating the manual labor associated with paper processing. For some large organizations with numerous local outlets or franchises, that expense can be startlingly massive. For example, a company that served as a master franchisee with hundreds of outlets across the U.S. was paying courier costs of more than a million dollars a year, simply to deliver invoices from local franchise locations to the master franchisee’s accounts payable department. Every week at the franchise headquarters, 15 to 20 people spent their days recording and coding all of the past week’s invoices in a tedious, error-prone, interminable effort. Paperless ERP relieves organizations of these transcription burdens and assures much more accurate results.

Third, the entire AP/AR process is simplified. Paperless ERP technologies—which are often based in the cloud—replace paper files, interoffice envelopes and couriers with digital documents that move themselves at electronic speeds. The solution also can create an automated workflow process. Each document that requires approval, payment or the generation of a communication to a customer moves through the AR/AP department in a prescribed fashion. After initial examination, the document is directed to the specific individual responsible for the next step. That staff member must complete the step before moving on to anything else. If the document is ignored, the system generates an alert to notify the individual that the document requires attention. No longer does a manager need to continuously pester staff or rummage through files to move documentation along. The payments themselves can be made electronically and tracked in the solution to further refine the process.

Finally, data becomes much more visible in a Paperless ERP solution. Paper often creates an accounting blind spot: When accounting staff do not know where documents reside—or even that they exist—the accuracy of their financial reporting can suffer greatly. Hundreds of bills may sit on the desks of district managers and accounting has no idea that this significant financial burden is out there. As a result, executives are unable to generate accurate financial predictions—they see only an incomplete subset of transactions that exclude those in process. A cloud-based paperless ERP solution always can produce the most up-to-the-second data for management reports, customer and vendor inquiries and other purposes. That means managers can spot trends more quickly and easily and can make any necessary adjustments earlier, preserving cash flow and profitability. Far less time is spent responding to calls from clients and vendors and more time selling, marketing, planning and carrying out other profit-producing activities.

Process enablement

In this light, the ramifications of the CCC formula become more apparent and more amenable to the organization’s control. Organizations find themselves more eager to invest in inventory because they know that they can accelerate payment of receivables through the automated internal processes built into Paperless ERP. With receivables coming in faster, the accounting department can pay suppliers on time and take advantage of dollar reductions offered by the suppliers for timely payment of invoices. The process transforms late fees into early discounts for the company.

The amount of time a business takes to turn cash into more cash is often a revealing sign of how efficiently the AP and AR departments are able to manage cash flow. Paperless ERP software provides a way for businesses in every industry to increase the efficiency and effectiveness of their AP/AR departments and, thereby, their cash conversion cycle. The technology decreases the time needed to process incoming and outgoing invoices and allows accounting departments to better capture, manage and access data through the lifecycle of an invoice. Further, companies save time and money by eliminating the need for paper processing and mailing and the overall business process is simplified.

Now may be the time for your business to consider one more cycle: a re-cycling of your accounting processes to take full advantage of Paperless ERP.

Nick Sprau is Vice President of Marketing for Metafile Information Systems Inc., Rochester, Minn., an independent provider of paperless document management applications serving middle-market and large businesses.