Starting a small business can often be a crash course in accounting, especially with so few entrepreneurs actually having any background or expertise in financial management. In fact, research has shown that a significant portion of small businesses simply turn to Google when they need some form of financial advice.
But once a business gets up-and-running — and begins to endure some growing pains — operating finances blindly is no longer an option. That rings true for payments, though even seasoned accountants know that optimizing accounts payable is hardly a walk in the park.
Dubbed the AP Optimizer, U.S. Bank and Sage’s new solution enables businesses to optimize both the timing and the method of their B2B payments, be it ACH, check, virtual card or wire.
“By showing the projected cash flow from both payables and receivables, the user quickly sees how to maximize their working capital and avoid ‘crunch times’ of late payments and lack of ‘float,'” explained U.S. Bank Corporate Payment Systems Head of Middle Market Product and Marketing Bradley Matthews in a statement on Monday (July 25).
Matthews recently told PYMNTS that this solution was a direct response to the demands of mid-market clients of the bank.
“What we heard from them was they need help understanding the best time to pay,” he said. “They need help knowing the best method of payment, and they want an easy way to pay all their suppliers across all the various payment types they prefer.”
By the time a company reaches middle-market status, it’s safe to say that a business owner is aware that the timing and method of a payment can have an impact on corporate cash flow, even if they don’t have time to sort it all out. Matthews explained that U.S. Bank clients at least understand this scenario.
“From an academic perspective, they philosophically know that costs and benefits differ among check, ACH, card payment and so on,” the executive explained. “But it’s very hard, when you’re going through and making payments, to connect the dots.”
Business owners hardly have the time to sift through cash flow, accounts payable and accounts receivable data and forecasts to be able to optimize their payment processes. But not doing so, Matthews noted, can lead to problems.
Crunch times, for instance, see businesses with a high volume of outgoing payments, bringing companies into what he described as a “dangerous area” that could land them in the red. Then, of course, there are those moments in the business cycle when a corporation is cash-rich — an optimal time to start pushing payments out, Matthews said.
Payment Rail Matters
Besides the obvious, there are also moments when businesses should pay their suppliers and pay them via a particular payment rail. These decisions, explained Matthews, are based on a range of factors.
For one, the payment float differs between each payment rail.
A credit card payment can strategically be made at a point in the payment cycle that enables funds to “float” for a longer period of time, say, 45 days.
The extra time with cash can, of course, be beneficial to a corporate buyer. But Matthews explained that AP Optimizer is about working with suppliers, too. For example, card payments can enable a supplier to get paid faster and encourage these companies to offer their business clients a discount by paying sooner.
While the executive admitted there has historically been “pushback” from some suppliers over accepting commercial cards, he said, most suppliers today recognize the security and efficiency benefits of electronic payment and see the method as part of doing business.
U.S. Bank’s new service may also support paper checks, but Matthews explained that the point of AP Optimizer is to help businesses understand where they may want to consider using a different payment rail apart from paper checks — and why.
Paying a supplier via check, he said, is rarely beneficial.
“The primary benefit we’ve heard from suppliers is an emotional impact. They like to get a check in-hand; they like to see it,” Matthews said. “That’s it. It is commonly accepted that, from an efficiency and cost perspective, the check is last on the list.”
Despite that psychological impact of receiving a check, suppliers actually prefer to get paid electronically, at least according to one study by Receivable Savvy, which found that 63 percent of vendors prefer ACH (just one quarter preferred paper check).
Various reports have declared other electronic payment methods, like cards and ACH, to be more efficient for both sides of the transaction. If the paper check is on one spectrum of payments technology, the other could be same-day ACH, an advancement in payments that is fast approaching and could have a massive impact on B2B payments, especially as companies look to optimize payment floats and lag times.
Matthews explained that same-day ACH will bring similar hurdles as ACH today.
“There still are some challenges in just setting up a supplier on ACH when the supplier may already be on one of the card networks,” he noted. “There will be costs. There will be setup. There are going to be challenges we have to overcome.”
AP Optimizer, he added, is ready to support same-day ACH in its analysis of corporate cash flows by allowing users to reduce the number of days it expects for a payment to process from about one to zero.
Ultimately, the new solution aims to help businesses migrate to more automated payment methods, Matthews explained, and to simply assess the data to make an appropriate recommendation for a company about when and how they should pay. But when small business owners have all the facts in front of them — including how much each payment method costs for each supplier — U.S. Bank is hoping these mid-sized firms will start to shift their payment habits to not only pay their suppliers more efficiently but to do so when it promotes success for both buyer and supplier.
Matthews said U.S. Bank and Sage describe this as a “marriage” of accounting and accounts payable.
“We’ve always done them side-by-side,” Matthews said of the two processes. “But they’ve never been truly married together and integrated in a way that provides new value opportunities.”