The New Landscape: Electronic Invoicing and the Effect on Cash Flow
Electronic invoicing (e-invoicing) has evolved considerably since its birth in the mid-1990s. It was originally focused on eliminating paper and postage costs by shifting paper invoices to an Internet-friendly format, but has quickly become a powerful tool for optimizing accounts receivable processes and controlling cash flow. This came as a surprise to many of the early adopters – how is it possible that savings from streamlined processes and improved cash flow would be worth 20 times more than savings from paper and postage? One consistent trend points to the answer – as new technology evolves, they often produce far more capabilities than imagined.
According to a study by The Kovi Group, 53 per cent of all businesses would prefer to receive invoices online rather than paper, and most of them consider this ability when choosing a vendor. But this recent surge in demand for e-invoicing is not just buyer driven – suppliers are also looking to streamline cumbersome invoice and payment processes.
Both buyers and sellers are using e-invoicing to accomplish two things. First, they want to use self-service Internet applications to do business more efficiently with each other. Second, they want to improve their ability to forecast and control cash flow and ensure they are doing business on the best terms possible. For a buyer, this means getting invoice data into their procurement system as simply as possible (whether it be SAP or Quickbooks), and ensuring they pay when it makes sense for them – taking advantage of trade discounts when savings are high, and, if not, delaying payment to ensure outbound cash is as slow as possible. For a supplier, this means giving buyers continuous access to invoice data in any format they need, managing disputes quickly, and understanding when and how payments will arrive so that they can get an accurate inbound cash forecast.
Self-service is a well-understood feature of e-invoicing, but it’s only recently that companies have discovered how it can improve cash flow forecasting and control. As e-invoice volume grows beyond 15-20 per cent of all invoice transactions, both buyers and suppliers begin to see much more information about when and how payments are sent and collected. Real-time insight into payment behaviour, disputes, seasonality, cyclicality, sensitivity to invoice amounts, usage of trade terms, etc, become available to finance and treasury teams. This in turn provides greater accuracy to cash flow forecasting.
Suppliers in particular have a unique opportunity to manage their inbound cash flow through e-invoicing due to improved visibility and use of self-service. An e-invoicing system provides a real-time view into all receivables, producing a highly accurate basis for forecasting. In addition, trade terms (such as trade discounts and penalties) can be modified in real-time to encourage payment behaviour. If a supplier needs to accelerate cash flow, they can increase trade discounts on open invoices and notify buyers immediately. In the paper world, this would have been too cumbersome. Trade terms, like the invoice itself, become more dynamic to meet the needs of the business.
Office Depot, the US-based office-equipment retailer, is a great example of how e-invoicing can produce results well beyond paper and postage savings, and positions them well for new benefits in the future. When Office Depot began its implementation in 2001, the focus was on reducing paper and postage expenses associated with “reprints” (follow up requests for copies of invoices). Once they implemented e-invoicing and began rolling out more and more features, they noticed some great high level impact to their business. Thousands of self-service reports and downloads were being run each month by buyers, avoiding customer support calls. Day’s sales outstanding (DSO) had improved over 20 per cent, freeing up tens of millions in working capital. Overall annual savings soared over $2m, growing well beyond what they had originally forecasted. Now Office Depot is in a position to improve its cash flow forecasting and optimize its trade discounts for over 120,000 business customers.
As more buyers and sellers use e-invoicing to do business, they connect on a much closer level. E-procurement systems become more tightly integrated with billing systems (and vice versa), and more transactions can be done by fewer resources. Buyers and sellers improve visibility into their businesses, as well as each other’s business. Trade terms can become much more fluid, reflecting the respective appetite for capital of the buyer and seller, and ensuring that cash flow is optimized in an industry. That’s much more exciting than eliminating paper.