7 reasons why e-invoicing is all about working capital management

March 15, 2012  |  Adoption, Electronic Invoicing, Payment

Increasingly e-invoicing is seen as an essential tool and a pre-requisite for effective working capital management. E-invoicing and financing are becoming more integrated than ever before.

FundTech noticed however that much of the current debate on e-invoicing has been about the obvious efficiency savings compared with manual paper based processes. Even though electronic invoicing is a compelling proposition on its own;  there are, however, several levels of significant additional benefits that can be realised with an e-invoicing service.

These higher-order advantages of e-invoicing are related to managing finance and SHOULD form an integral part of a corporates operational finance procedures for managing working capital.

The 7 reasons why e-invoicing is all about working capital management

The main reasons why e-invoicing enables corporates to better manage their working capital are:

1

Reduction in DSO

In our experience implementing an e-invoicing solution reduces the Days Sales Outstanding (DSO) by up to 10 days. The real time communication of structured data, the tools assisting query resolution and automated workflows enabling rapid approval and payment of invoices means corporates get paid quicker with less hassle.

2

Improved Visibility of Receivables

In a fully dematerialised world, the current status of electronic sales invoices can easily be tracked.  The sender knows whether the recipient has received the invoice, has viewed it, queried it, approved it or scheduled a payment.  Such detailed knowledge on the status of receivables is summarised in a number of reports that provide the seller with clear expectations of future cash in-flows.

3

Flexible Management of Receivables

If there is a temporary squeeze on working capital, any outstanding receivables can be brought forward with financing mechanisms such as Invoice Discounting or Factoring.  Finance is advanced to the seller by a third party financing institution based on the strength of the seller’s future receivables. E-invoicing provides an efficient mechanism for bundling and presenting receivables data to rapidly secure cost-effective financing.

4

Improved Payables Reporting

The use of electronic purchase orders (PO) and the automated linking of these POs to the received e-invoices provides an accurate and timely view of an organisations payment liabilities. The accurate assessment of receivables and payables provides more reliable cash-flow forecasts, which in turn reduces the amount of working capital required. The released capital can be put to work more effectively in other areas in the business, either to fund growth or fund an early payment scheme….

5

Early Payment Discounts

A corporate with sufficient capital can make better use of their cash by paying suppliers quicker in return for a small discount. A typical 2% discount in return for payment within 10 days provides a return of about 36% AER - where else would a corporate get similar returns? Paying quicker means approving invoices quicker. An automated accounts payable process with electronic purchase orders, electronic invoices and matching tool enables a corporate to be in a position to pay within days, not months.

6

Increasing DPO with Supplier Financing

With e-invoicing, the early approval of purchase invoices (typically within 5 days instead of 23 for paper based invoices) means there is sufficient time to implement alternative financing mechanisms for the invoice before the due date. The approved invoice becomes a payment obligation that can be financed by a third party - with the funds being collected from the buyer at some future, flexible date. This provides the buyer with control over their Days Payables Outstanding and consequently their working capital.

7

Transparency and Risk Reduction

A full and historical 360 degree view of the corporates activity with their trading counter-parties provides financing institutions with an up-to-date and accurate view of the corporates business. The level of transparency improves risk evaluation and may result in an organisation accessing finance at more competitive rates.


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2 Comments


  1. Very true! E-invoicing for the sake of e-invoicing is not what any company should aim for. It is THE door opener for drastic process improvements throughout departments. Good to see that this knowledge finally gains in popularity.
    A colleague, wrote an article about “Why e-invoicing is the missing link for supply chain finance adoption” which I think gives an added perspective to the above: http://tradeshift.com/blog/why-e-invoicing-is-the-missing-link-for-supply-chain-finance-adoption/
    A good read on point #6

  2. The business firm uses working capital to buy inventory and finance their routine ventures. The inventory purchased and the routine activities give rise to sales revenue which essential for generating profits to the business venture.e-invoicing is seen as an essential tool and a pre-requisite for effective working capital management.