Digitizing the Cash Application Process Reduces Supplier DSOs by 30%, Improves Cash Flow

The past year and a half has seen no shortage of technological transformations – and, increasingly, companies have set out to “make over” their accounts receivable (AR) operations through digitization.

As Tim Stahl, senior vice president at Versapay, told PYMNTS, digitizing the cash application process, a key component of the order-to-cash workflow, can decrease suppliers’ days sales outstanding (DSO) by as much as 30% and helps eliminate “short payments” – which in turn means revenues are converted into cash in a company’s coffers more quickly. That frees up finance teams to perform more strategic, impactful work.

Platforms such as those on offer from Versapay allow suppliers to start with digital invoicing and maintain “digital follow-up” on payments, sidestepping paper checks, envelopes and stamps.  Suppliers can see whether customers have opened up emails and interacted with invoices, and can reliably analyze, normalize and import unstructured, messy remittance data (often sent separately from payments) by digitizing it.

Best practices exist when the AR process for a supplier and the accounts payable (AP) process for their customer are synthesized into one process, where each firm is able to see what’s going on with both sides of the transaction and can participate collaboratively on that, said Stahl.

Setting the Stage

By and large, there’s been a decreasing reliance on the paper check and the paper invoice as the means to get payments done between buyers and suppliers.  Though the transactions themselves may be streamlined, reconciling it all in the back office can be a challenge, maintained Stahl.

AR management is a constant flow of discrete tasks, where each step depends on its predecessor to create a continuum of taking incoming payments and matching them, in the back office, to the correct customer accounts and invoices.

To operate optimally, companies must retool entrenched processes.

Retooling Age-Old Processes

“There has always been tension in the fact that payments get deposited somewhere, and the details of those deposits come in another form” of communication, said Stahl.

The age-old methodology has been that suppliers send a paper invoice and buyers send checks – and the hope springs eternal that remittance paperwork has a list of what was due to be paid, and for what reasons. If something did not match up, the phone calls would start.

“So now you’re chasing your customer around, trying to get information so you can go into your ERP system and relieve these open invoices,” said Stahl. “Short” payments might result, and then the finance team would have to open up investigations to find out what’s gone missing, and why.

He also noted that there can be changing power dynamics between buyers and suppliers, dictated by payments themselves. Suppliers who sell to much larger customers may find payment terms dictated to them.

All of this has been complicated by the myriad payment flows that come into, and move out of, firms on a daily basis. Manual payments abound, but so do digital payments. Credit card processing, ACH payments and lockboxes are part of the picture. The ERP, a system of record, is not a system of action, said Stahl, and is tied to manual reconciliation. The more forms of payment flows that are out there, the more complicated and difficult it has become for AR departments to perform cash application – with negative ripple effects up and down supply chains.

“Sometimes if a customer is delinquent, you need to hold their payments or their shipments up,” noted Stahl. “Their ability to buy future things from you impacts their credit rating. How will they pay when you’re trying to close the books at the end of the month? You need to be able to reconcile between what’s sitting in your bank and what’s in your ERP.” Preferred payment methodologies can also be stored on the platform and invoices can be grouped together.

Fixing the ‘Short Payments’

Those aforementioned “short” payments also gain some digitally aided insight: Because Versapay’s platform is collaborative, buyers and suppliers can invite people to participate in fixing that case and resolving unapplied balances in a process Stahl calls “on-platform cash application.” Artificial intelligence (AI) ensures that the matching gets better over time as cash application becomes more automated, reducing the manual tasks and manpower hours devoted to those tasks.

“Depending on what technologies you put between you and your customer, you can have lots of information you can’t have in an analog process, where paper is flying back and forth,” Stahl said.