Payments in a Just-in-time World
Most businesses have taken full advantage of the electronic world. Buyers and sellers conduct instantaneous transactions in a just-in-time environment. Instead of ordering 1,000 widgets once a year, they order on a weekly or monthly basis, dealing only with suppliers whom they trust to meet their demands.
Yet even though businesses operate in a just-in-time world, one thing hasn’t changed: Businesses still take 30, 45 or 60 days to pay for goods and services. In other words, suppliers take the short end of the liquidity stick. They do their job, incur their costs, then wait a month or more to get paid. Purchasers, meanwhile, receive their goods, but may take days or weeks to resell them. In the meantime, they’re carrying inventory that they’d prefer not to pay for immediately.
Commercial credit cards are changing this equation. With a commercial credit card, financial institutions act as providers of liquidity. The supplier ships goods and receives a payment within two or three days. The purchaser receives the goods, on schedule, but still doesn’t have to pay for them for 20, 30 or 45 days depending on the card program.
Commercial credit cards have become enormously popular. According to a recent survey of 579 North American card-using organizations, annual program spending doubled from US$40 billion to US$80 billion in the two-year period between January 2001 and 2003. By consolidating corporate travel and entertainment expenses and purchasing onto a single card program, businesses can better control costs, reduce time-consuming reconciliation and gain access to current expense data online.
Benefits of a vendor receivables program
Commercial credit cards are used primarily by larger businesses with sales of more than $20 million per year and that charge at least $3 million to $5 million annually to company credit cards. Recently, new card applications have been launched that leverage the card network and technology to expand the functionality of the card programs from mainly a payment and expense solution to include a receivables solution.
Some financial institutions have introduced vendor receivables programs that allow companies to extend credit to their regular clients or purchasers, while simplifying the receivables process and reducing administrative costs. In these programs, companies can issue credit-card accounts to their clients to be used for purchases exclusively from the issuing company.
These programs are ideal for companies in the wholesale and distribution industries, particularly if they have a large number of small retailers and distributors as buying customers, several key customers generating a large number of purchase transactions each month, a large volume of cash collections, or cash-flow-sensitive operations and outstanding accounts receivables.
Companies can issue physical cards or provide account numbers to their clients to be used when the clients make purchases from the issuing company. Online controls ensure this card number can be used only with the issuing company.
The program allows companies to accelerate cash flow and manage business receivables, while giving them access, in real-time, through a Web-based electronic reporting system, to each of their client’s accounts. This same reporting system also allows the company to generate management reports that assist them in monitoring and analyzing their client’s purchases.
As well, the issuing company can receive payment in as little as 72 hours, while providing its customers with the equivalent of 30-day terms. The account holders are responsible for settling their accounts monthly with the bank, but the bank has ultimate recourse to the issuing company if a client of the company cannot meet part, or all, of its obligation.
Other benefits include electronic reporting and online tools that extend and manage customers’ credit, in real time, which practically eliminates labour-intensive invoicing, cash and cheque handling, reconciliation and collection tasks. In addition, individual transactions can be mapped directly to a customer’s general ledger. The company’s customers benefit from a 30-day billing cycle, receiving a detailed statement from the supplier’s financial institution of their purchases and making simple, efficient payments of their monthly account balance.
A vendor receivables program provides benefits to suppliers and purchasers alike. For a supplier, an order is processed immediately without the need for a purchase order, and payment is received in as little as 72 hours. At the end of the billing cycle, the bank is paid for the items purchased and the purchaser receives an itemized statement for quick reconciliation, requiring only one payment to the bank. The value in this process is the supplier has a short accounts receivable process with fewer collections and the purchaser has early receipt of goods and an easier reconciliation process.