Can Automating Working Capital Insulate Businesses From an Economic Downturn?

These are tense times for financial managers across industries and sectors. Companies are grappling with a slowdown in business activity while facing an increase in delayed payments, a trend observed across all industries. With the ever-present threat of a looming recession, business owners are increasingly concerned about the economic outlook and how it will impact business in the next year.

Meanwhile, the Federal Reserve’s continued intervention to reduce inflation by raising interest rates compounds matters. Increasing borrowing costs mean businesses are struggling to shore up liquidity, sustain working capital and remain competitive in the marketplace.

Economic Challenges Beset Payments Across Industries

Companies Are Scrambling to Improve Cash Flow

AR Automation Is Proving Effective in Liquidity Management

Decision Guide: How Payments Automation Can Be a Game-Changer for Businesses

Economic Challenges Beset Payments Across Industries

Current market conditions have businesses scrambling to improve cash flow. This ongoing struggle is jeopardizing their liquidity and working capital positions.

44%

of companies believe their AR teams have the skills and resources to thrive in the current market environment.

Delayed payments underline the crucial importance of AR teams.

There is a wide gap between the perceived importance of accounts receivable (AR) and the resources available to support it as finance teams are forced to operate with limited resources within the entire order-to-cash cycle. According to a recent Billtrust study, 83% of surveyed business owners and C-level executives say their AR activities are more critical to their businesses’ success than ever.

Inventory glut is a concern.

Slow sales are saddling businesses with growing inventories, eroding profitability as companies incur higher maintenance costs. Fewer than four in 10 businesses anticipate inventories returning to normal levels in 2023, with the same number expecting surpluses to continue well into 2024. Adding to the strain of higher maintenance costs, excess inventory levels also increase businesses’ tax burden, as companies must pay taxes on inventory, further weakening their bottom lines.

Tighter financial conditions are exacerbating payment delays.

The duration of payment delays across industries in the Asia-Pacific market has increased significantly due in part to aggressive interest-rate hikes that tighten financial conditions. According to a recent study of 2,300 companies in the region, seven of the 13 surveyed industries encountered longer than average payment delays. Further, 80% of the payments overdue for more than six months — classified as ultra-long payment delays (ULPDs) — are never paid, presenting a serious risk to cash flow as they account for more than 2% of a company’s annual revenue. Although ULPDs fell to 26% in 2022 from 34% in 2021 for companies above the 2% threshold, the proportion remains high and is a significant drain on cash flow.

The length of payment delays — measured on a month-over-month basis — is on the rise across many industries. Retail, pharmaceuticals and energy experienced a 12-day average increase in the length of payment delays. The energy and construction sectors had it the worst, with an average payment delay of 77 days.

Companies Are Scrambling to Improve Cash Flow

Businesses have exhausted legacy strategies for improving cash flow. Now they must decide how to address declining cash flow with AR enhancements.

A lack of options to improve cash flow is weakening working capital performance.

The largest companies in the United States struggled to extend the terms of supplier payments in 2022, likely having reached the upper limit on delaying these payments — a strategy historically used to augment their bottom lines.

In 2022, for the first time in five years, the days payable outstanding (DPO) — a measure of the number of days companies take to pay suppliers — fell by five days, or 8%, forcing businesses to surrender liquidity on the asset side.

PAYMENT DELAYS

U.S. companies have reached the limit on delaying payments to suppliers — a strategy used to boost their bottom lines.

Reliance on supply chain financing is exposing vulnerabilities for businesses.

Businesses have become increasingly reliant on supply chain financing (SCF) — a set of technology-based business and financing processes that yield lower costs and improve efficiency for parties involved in a transaction. This scheme helps improve working capital position and positively impact earnings before interest and taxes (EBIT). U.S. companies are currently drawing $150 billion in SCF to boost working capital, with S&P 500 companies alone using the most, at $100 billion.

However, the risks associated with this approach have surfaced of late. First, the cost has increased significantly as the Fed has raised interest rates by 525 basis points since March 2022, with even more hikes expected. Adding to this are the recent bank failures that have placed stress on the financial sector, spelling trouble for its ability to service SCF, as it is an uncommitted line of credit — meaning banks can withdraw financing at any time.

Businesses are opting to delay supplier payments to address current market conditions.

More than one-third of European businesses are paying their suppliers later than they would permit their own customers to pay them. The United Kingdom leads this trend at 54%, followed by France and Germany at 36% and Spain at 33%. The market has coined this trend “late payment hypocrisy.”

According to the European Payment Report, late payments are common across all sectors as suppliers accept longer payment terms to avoid damaging customer relationships. About half of businesses blame their late payment hypocrisy on their struggle to upgrade payment processes.

AR Automation Is Proving Effective in Liquidity Management

Businesses must modernize their financial management infrastructure not only to stay afloat but also to remain viable in a competitive marketplace. Automation offers a feasible solution to address cash flow, liquidity and working capital shortfalls.

73%

of businesses reported faster payment processing with automated payments, resulting in improved cash flow and liquidity, reduced days sales outstanding (DSO) and strengthened customer relationships.

Poor cash flow management is the main culprit in late payments.

Nearly one-quarter of U.K. finance professionals cite poor cash flow management as the primary cause of late payments. One-third say automation could expedite improvements in cash flow management as well as address inflation.

Finance professionals in the U.K. are cutting costs across the board to counter the impact of rising prices and tightening credit conditions. To this end, businesses are downsizing offices to save on energy costs and automating operations.

AR automation is addressing the late-payments conundrum.

Eight in 10 businesses now say they are experiencing an increase in delayed payments, particularly in the manufacturing sector, where late payments cause financial strain. Additionally, supply chain disruptions and shifting consumer spending patterns are also making it difficult for businesses to pay bills on time.

To address these concerns, businesses are investing in AR systems, with 73% of those adopting digital payment technologies achieving faster payment processing and improved cash flow. Likewise, the number of companies making these improvements is growing, which indicates that more and more businesses are embracing technology to transform their AR practices.

Inadequate digital skills in financial management present challenges for optimizing business decisions.

While automation is proving effective, it is not without its challenges. According to a recent study, about 29% of finance managers have few or no digital skills and are uncomfortable with artificial intelligence (AI), while roughly 14% have expert digital skills. This skills gap is giving rise to inaccurate data, skewed analyses, poorly informed management decisions and, most importantly, lost revenue.

The same study showed that 82% of businesses still rely on manual credit decisioning processes, with 27% of finance managers calling these methods rigid and ineffective.

Decision Guide: How Payments Automation Can Be a Game-Changer for Businesses

PYMNTS Intelligence offers the following decision guide for businesses confronting late payments and cash flow challenges on how to capture, retain and maximize payment streams in the current economic environment.

• I’m struggling to get paid, and payment delays are getting longer. How can automating payments help?

Automating payment systems can help companies speed invoice processing, reduce human error and cut costs. Nearly three-quarters of businesses that have automated payment structures reap the rewards of faster payment processing, improving cash flow and liquidity, reducing DSO and enhancing customer relationships.

• My company has consistently relied on manual payment processes, and my staff are uncomfortable with a digital shift. What steps should I take to address these issues, and why?

You are not alone. More than eight in 10 businesses still rely on manual credit decisioning processes, exposing them to risks of errant data, lost business and potential regulatory violations. Instead of focusing on growth and remaining competitive, companies relying on manual payment processes are falling behind those that have embraced automation, with 50% of businesses blaming late payments on poor routines and processes, describing them as weak. All of this points to a critical need for businesses to upskill their workers and digitize their tools and processes as quickly as possible.

• I realize the need to automate, but why should I invest in a slowing economy while prices continue to rise?

In response to a slowing economy, conventional wisdom suggests businesses take a pro-cyclical approach and cut costs across the board. This is exactly what is happening in the U.K., where 43% have resorted to massive cost-cutting measures to tame inflation and boost bottom lines. As it turns out, this strategy has not quite delivered. Businesses should instead follow a counter-cyclical approach to safeguard liquidity and working capital. Companies that modernize payment systems are better situated to survive a slowdown in both business and economic growth for two reasons: First, it improves cash flow, and, second, it protects them from having to make harsh operational decisions that could have lasting consequences.