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Unlock Working Capital With Automated Invoice Management

Unlock Working Capital Through Automated Invoice Management

Working capital is essential for enterprise operations and this applies to both public and private organizations. Liquidity management plays an important role in rising as well as falling interest rate regimes. Supply chain finance programs between buyers and their top suppliers (with the majority of spend) are the new strategic tools for working capital optimization (to the tune of hundreds of millions of dollars) for most Fortune 500 companies. In developed markets, there is a potential for expansion into a broader supplier network (mid-tier spend), while emerging markets are still moving beyond the inventory management maturity to tap into supply chain finance for better working capital. Getting an effective boost in working capital needs a closer look at the cash management cycle. A calculation worth considering:

Cash-to-Cash cycle (C2C) = Days Inventory Holding (DIH) + Days Sales Outstanding (DSO) – DPO (Days Payable Outstanding (DPO)

Let us look at the key parameters for the cash conversion cycle:

  1. DIH: Physical inventory management has been perfected in most markets (despite the hiccups posed by force majeure events) particularly in sectors such as automotive, supermarket chains (retail) and manufacturing
  2. DSO: Reducing days sales outstanding by 10 or more days (by increasing sales) is an aggressive outlook, particularly where competition is already stiff in the Fortune 1000 list
  3. DPO: Pragmatically managing days payable outstanding allows buyers to wield a lot of influence and provides significant working capital benefits once suppliers get onboarded, leading to enhanced supply chain finance too. CXOs are keen to unlock this potential since it has a direct impact on shareholder value and provides a competitive edge

Contracts form the foundation of commercial activities in the global network spanning buyers and suppliers. Contract execution, covering performance and finance management, is the key to unlocking the true value of contracts and enhancing ongoing business relationships – particularly where direct or indirect spends are the focus points. This is where smarter contracting helps teams extract the maximum value of their contracts through the power of AI and automation to ensure efficient supplier performance management and invoice execution.

This is a win-win solution to unlock working capital for both buyers and suppliers by increasing DPO, but the stumbling block of invoice approval time still persists. While DPO has steadily increased (except where regulated by law such as in France) despite a rise in electronic invoicing adoption, the approval time is still in double digits [ref. Table 1 below]. This reduces early cash flow and working capital for both supplier and buyer (whether it is via a self-funded program run by the buyer or through an intermediary like a bank). Imagine reducing invoice matching and approval time from a figure which ranges between 40 and 15 days (depending on developed or emerging markets) to a few days. Where DPO is reaching a ceiling (governments in UK, USA, and in some other countries have already stepped in to stem the increased arbitrage levers being used), quickly approving invoices for trade receivables can add millions of working capital for both parties in a sizeable buyer-supplier relationship.

When it comes to invoice matching and approval, the key aspects to achieve faster, swifter, error-free operations are:

  1. Electronic invoices
  2. Ability to match invoice against purchase order, contracts and pricing books (4-way invoice matching is ideal)
  3. Automated flagging of discrepancies or matches for approval
  4. Easy integration with other enterprise systems for faster approvals and smoother payments

These are also the fundamental enablers which can propel a company to move to a blockchain-based ecosystem of contracts and payments (smart contracts), which will further improve payment efficiencies.

At Sirion, we help buyers and suppliers focus on and realize benefits from their contracts in both hard and soft dollars, by providing a full bouquet of contract lifecycle management/smarter contracting solutions, at the heart of which is automated invoice management. To find out more, please visit https://www.sirionlabs.com/webinars/.

Table 1: Invoice approval survey (Source: Level research data for North Americas)

Invoice approval survey

 

 

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