Gig Economy

AP Automation’s Role In Paying The Gig Economy

The rise of the gig economy is inexorable. By some estimates, within this decade, about half of the U.S. workforce will be made up of self-employed individuals. With the rise in short-term ad hoc work, the very nature of how workers are paid is changing, too.

For the companies that pay these workers, sometimes globally and across currencies, managing accounts payable (AP) processes is quickly becoming a complex endeavor. As the traditional payroll functions recede into the background, handling huge volumes of invoices — for platforms, that can mean thousands of invoices — becomes unwieldy. The companies that outsource large amounts of work to freelancers may find that the legacy systems and practices that worked for decades are suddenly insufficient to keep track of it all.

To that end, AP automation can make all the difference in whether a company or platform keeps its roster of gig workers in place — or whether, spurred by late payments or other less-than-satisfactory experiences, those workers vote with their feet, and take their skills and services elsewhere.

A High-Level View Of AP Automation

In an interview with PYMNTS, Todd McGuire, Tipalti’s general manager of supplier success, said that “some companies fix things out of pain, and other companies fix things because they’re preparing to scale.” Regardless of the vertical, though, McGuire noted that automating AP gives greater visibility into the actual cash flow that surrounds various parts of the business.

When every invoice is fully accounted for within a firm, he explained, financial professionals gain insight into the real sources of revenue — as measured against costs. That information flow comes in on a real-time basis, rather than through the typical process of month-end reconciliation.

“Somebody with really great visibility into AP can fund their growth through extended terms to their suppliers because that is part of working capital,” McGuire said. In addition, companies can fund their growth through margin expansion, as they can negotiate vendor discounts and pay their suppliers earlier.

At a high-level view, that changes the number of levers that can be pulled — from a finance perspective — around the working capital associated with AP.

“But without automation, you don’t have any of those levers to pull. It’s virtually impossible without automation to capture vendor discounts,” said McGuire. “It’s virtually impossible without automation to really look at your working capital position in an interim perspective.”

The Partnership Advantage

Partnering with an AP automation firm, said McGuire (who pointed to Tipalti), also has advantages for companies looking to expand geographically. The partnership model means that firms seeking to streamline cash flow functions do not have to link up with in-country banks and puts into place a building block to growth — namely, moving money in other countries across currencies and foreign exchange rates.

Typically, McGuire stated, a firm operating only in the U.S. might take an Excel file out of a performance measurement system and upload the file to its bank. However, the firm that expands to 12 countries might use its bank to send payments across international wires.

“That starts to get expensive quickly,” he said. AP automation tackles those (and other) back-end functions, such as streamlining the onboarding of gig personnel, automating tax compliance for their W-9s, paying global freelancers in local currencies, reconciling payments and integrating with ERP systems.

McGuire pointed out, “You don’t have to deal with the messiness of supplier onboarding, or the messiness of banking and payment infrastructure.”

The Gig Economy

The gig economy carries with it a set of special concerns when it comes to payments, especially for platforms. As McGuire illustrated, a 50-person, middle-market company that relies on traditional vendor relationships likely has a manageable level of invoices, but a 50-person gig economy platform company may have 6,000 freelancers that it has to pay on a biweekly or even weekly basis.

“For those freelancers who pick you to provide goods and services, that experience matters greatly in determining whether or not they stay with your platform,” he explained. “Even though you are paying them, they are your source of revenue. … A lot of what had been seen as value-added services are now table stakes, and matter tremendously in the gig economy.”

That includes having the right payment choices in place, as gig workers want to be paid in their home currencies, McGuire noted.

The Advantages

As McGuire said, for platform (and other) firms, making tens of thousands of payments to thousands of recipients requires automation. Automating the onboarding process — collecting data, and ensuring that 1099s and tax compliance are in place — is becoming especially critical in a regulatory environment that is growing more, not less, stringent. McGuire predicted that recent legislative moves governing the classification and payment of gig workers, such as in California and New York, will spur a greater embrace of AP automation.

The embrace of AP automation carries inherent advantages, explained McGuire — namely, the freeing up of resources in terms of time, money and people. Smaller finance departments will be able to do more without having to grapple daily with AP functions.

As he told PYMNTS, “AP automation is truly one of the things that has to be there to unlock a lot of the business models in the gig economy because, without AP automation, you can’t pay all the people in the ways that you — and they — want. And without being able to pay the lifeblood of your business as freelancers, you can’t grow your business.”

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New PYMNTS Report: The CFO’s Guide To Digitizing B2B Payments – August 2020 

The CFO’s Guide To Digitizing B2B Payments, a PYMNTS and Comdata collaboration, examines how companies are updating their AP approaches to protect their cash flows, support their vendors and enable their financial departments to operate remotely.

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