By Glenn Davis and Cathy Powell
While the economy has improved and businesses are beginning to experience growth, one of the challenges companies face today is access to the credit necessary to invest in their businesses and drive growth. Increased rules and regulations related to the Great Recession have tightened access to much-needed credit, but one positive result is businesses are looking for ways to manage internal processes more efficiently and increase access to cash.
One of the most logical areas for consideration has been working capital. When we think about capital management, the goal is to manage the cash conversion cycle as efficiently as possible. The cash conversion cycle considers days sales outstanding (DSO) as well as days payables outstanding (DPO) with the goal of reducing the amount of time it takes to collect money owed and increasing the amount of time allowed to pay trading partners and suppliers (hold onto cash as long as possible without damaging credit and vendor relations).
Not only does your business benefit by increasing your available cash, it reduces your borrowing needs and borrowing costs. It also increases your access to credit by improving your business operating performance – making your business more attractive to lenders.
One of the most important opportunities to improve the cash conversion cycle is how you manage your payments. Today, there are four basic ways to make payments:
- ACH (Automatic Clearing House) payment
- Wire transfer
- Purchasing credit card
Even though payment by check is the most inefficient and difficult method to manage, many businesses still use checks. According to a 2013 AFP Electronic Payment Survey by McKinsey & Co., five out of 10 payments made in the United States are still by check. Many times moving away from paper involves IT resources, something seldom available to most companies. However, in the long-term, moving to an electronic payables system not only gives you far better control of when payments are transmitted, it addresses a variety of issues inherent in the paper-based check system, such as:
- Exposure to fraud and incidence of errors
- Less time tracing errors and booking general ledger entries
- Multi-layer security to protect transactions and data (81 percent of organizations have increased use of electronic payments for business to business transactions to mitigate payments fraud risks – source: 2011 AFP Payments Fraud and Control Survey)
- Built-in workflow controls strengthen, simplify and automate your approval process
Building an in-house electronic payment system could be worthwhile. Many small to mid-size businesses use a vendor to manage their payments. The advantage is avoiding infrastructure costs while quickly gaining the benefit of increased cash flow. Outsourced solutions are reasonably simple to employ:
- No major modifications to A/P processes or software required
- Proactive vendor outreach and enrollment to encourage acceptance of electronic payment instead of check
- Support for virtually any file, any format
Improving the cash conversion cycle is specific to each business, but increasing cash on hand can fuel your business’s success. Take time to understand your operations and involve key managers to identify the best working capital management plan for your business. Ask your BB&T Wealth advisor about electronic payables systems or other cash management opportunities.
About the Authors
Online Commerce Product Team Manager
Glenn leads the commercial online platform Cash Manager Online (CMOL), CMOL Mobile, Online Security/Authentication, Commercial Portal, Information Reporting, Sweep/ZBA, and escrow services. He holds a bachelor’s degree in finance from Florida Atlantic University, Boca Raton, FL.
Product Manager Payment Solutions
Cathy, a 25-year banking veteran, is responsible for BB&T’s OnSite Deposit, Image Cash Letter and OnLine Payment Connection. Her banking experience includes retail services, lending and business development roles. She holds a bachelor’s degree in marketing and management from the University of North Carolina at Greensboro and is a graduate of the Graduate School of Banking at Louisiana State University.