Cash Flow Management & AR/AP Automation: The Most Important Innovation for Small Businesses

September 14, 2017     By : Elena Mesropyan

The owner of a company tells his employees, “You worked very hard this year, therefore the company’s profits increased dramatically. As a reward, I’m giving everyone a check for $5,000.” Thrilled, the employees gather around and high-five one another. “And if you work with the same zeal next year, I’ll sign those checks!”

– Author Unknown

The ones to laugh the hardest would probably be people closest to the problem – small-business owners. Small businesses represent a strong community-building and economy-driving force in any nation: countries that created the most business-friendly regulatory environments for setting up and running a business, are some of the most prosperous. According to the US Small Business Administration, the small-business ecosystem in the US is a massive industry and represents 99.7% of all US businesses. The 28 million small businesses in America account for 54% of all US sales. Moreover, small businesses provide 55% of all jobs and 66% of all net new jobs since the 1970s. The 600,000+ franchised small businesses in the US account for 40% of all retail sales and provide jobs for some 8 million people.

Establishing and running a small business can be challenging, making business banking a critical niche in the financial services industry. The caveat with the traditional sector, however, is that business banking is just that – banking. It is mostly limited to providing a bank account and a line of business credit rather than getting mixed in other vital aspects of business operations.

Meanwhile, for small-business owners, running a successful venture goes beyond a bank account, into risk management, compliance, bookkeeping, accounting, taxes, payroll, etc. Cash flow management automation is one of the most important parts of sustainable business operations. Report by Concur, a SAP company, suggests that the average cost to process an invoice stands at $12.90, with a median invoice processing cost of $7.90, citing the Association for Image and Information Management (AIIM). Interestingly, AIIM found that there is little correlation between average invoice processing costs and the size of an organization.

Automation promises an average of 29% reduction in invoice processing costs, which can translate to $300,000 per year for an organization that processes up to 10,000 invoices per month. While cash flow analysis is the top priority of senior finance executives, 22% of all businesses can only forecast their mid-term cash flow with a dismal 5% accuracy, AIIM found.

These costs, however, do not describe the problem in full. Paper-based and semi-automated cash flow management has other hidden costs that chip away at profit margins, the SAP company emphasizes: manual processes, processing errors, poor cash flow visibility, poor spend management, too many exceptions, onerous regulatory compliance, risk of fraud, and fragmented systems.

Affordable innovation in those areas allows releasing limited resources of small-businesses teams for reallocation in areas that are critical to long-term success – product/service innovation, customer and vendor relationships development, research, among other things. One of the ways organizations can reduce costs and better manage finances is through AR/AP automation.

Automation brought by FinTech startups into cash flow management (examples include YayPay, Corcentric, etc.) carries significant benefits for small businesses, such as lower purchase-to-pay process costs, efficient exportation of data into billing or document management systems, elimination of manual data entry mistakes, advantage of fast payment discounts, improved response to vendor inquiries concerning invoice statuses, improved cash on hand planing, ready access to information for reporting and analysis to balance workloads and identification of process bottlenecks, and more. In more important business owner terms, 41% of AR system users report a payback time of nine months or less. This rises to 82% in 18 months or less.

The Institute of Finance and Management (IOFM) emphasizes that implementing a high level of AP automation enables businesses to reduce the average cost of processing a purchase order-based invoice to $7.03 compared to an average of $9.62 for businesses with little or no automation.

Moreover, automation reduces the cost of processing a T&E expense report. Businesses with a high level of AP automation report that it costs an average of $6.86 to process a single T&E expense report, compared to an average of $12.19 for businesses with little or no automation, according to IOFM research cited by Concur.

Combining automation and best practices delivers bigger savings, professionals note: it costs best-in-class organizations $3.34 on average to process a single invoice from receipt to approval.

“As funny as it might seem, small-business owners remain the largest users of checks and also use Excel to manage their cash flow, which remains cumbersome and inefficient, especially when trying to secure a loan. Therefore, automation is key in the next few years, removing the friction of getting money and making it all much more transparent,” shared Janet Zablock, the Head of Global Small Business at Visa [Janet officially left Visa on May 1, 2017], and currently, an Independent Board member at Nav ,Inc.

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Elena Mesropyan
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Elena Mesropyan

Global Head of Content at Let's Talk Payments
Elena is a research professional with a background in social sciences and extensive experience in consumer behavior studies and marketing analytics. She is passionate about technologies enabling financial inclusion for underprivileged and vulnerable groups of the population around the world.
Elena Mesropyan
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