The Best Way to Digitize Your Cash Cycle

Table of Contents

1. What is Cash Digitization?
2. Digital Cash vs. Credit Cards
3. Challenges with Traditional Payments
4. Steps to Improve the Cash Cycle
5. The Future of Payments
6. Taking Action to Digitize

Key Takeaways

• Cash Digitization: Streamlines payments, invoicing, and reconciliation for improved efficiency.
• Digital vs. Traditional Methods: Digital cash is faster, cost-effective, and reduces reliance on manual processes.
• Challenges of Traditional Systems: Mailed checks cause delays, increase costs, and create cash flow issues.
• Optimizing Your Cash Cycle: Automate invoicing, adopt digital payment portals, and integrate AR platforms.
• Future of Payments: Digital solutions offer speed, cost savings, and better customer experiences

Digitizing the enterprise cash cycle is a complex undertaking. Some companies dodge it entirely to avoid losing customers or incurring operational expenses. Others try digitization to save time and reduce costs but regularly miss the mark. This three-part post will look at the enterprise cash cycle and what it means to modernize your business payments truly.

What is Cash Digitization?

Many attempts at cash digitization fail from a variety of reasons like too broad of a scope to unclear expectations. In some cases, businesses can attempt to change too much, too fast, resulting in mismatched operations and confused employees. A business often tries to slap a solution as a "quick fix" on one process without considering the entire procedure.

Rather than evaluating the opportunity to optimize the whole process, they take one small part of it and try to "plug the hole," so to speak.

What Is the Difference Between Credit Cards and Digital Cash?

Credit cards allow users to borrow funds from a financial institution to make purchases, often with higher transaction fees and interest charges for unpaid balances. They rely on card networks like Visa or Mastercard for processing. On the other hand, digital cash represents direct electronic transfers of funds, bypassing intermediaries and reducing transaction fees. Stored in digital wallets or accounts, digital cash offers a faster, cost-effective, and more streamlined payment solution compared to credit cards.

What Is the Disadvantage of Using Digital Cash?

While digital cash offers numerous advantages, such as faster transactions and reduced reliance on physical currency, it also presents challenges:

• Security Concerns: Digital cash systems can be susceptible to cyberattacks, potentially leading to financial losses.
• Technological Dependence: Users must have access to digital devices and reliable internet connectivity, which might not be available for all.
• Regulatory Challenges: The evolving regulatory landscape can create uncertainties for businesses and consumers adopting digital cash solutions.

Paystand addresses these challenges by providing a secure, zero-fee digital payment platform that leverages blockchain technology to enhance transaction security and efficiency. Our system employs bank-grade data security measures, including advanced fraud prevention tools, to protect your transactions across all payment types and minimize chargebacks.

By integrating these robust security protocols, Paystand ensures businesses can confidently embrace digital payments, mitigating common disadvantages associated with digital cash.

It’s time to consider your digital cash process

Let's take a look at one example regarding an accounts receivable process. Paystand customer BIIA Insurance formerly accepted most payments for insurance premiums via mailed paper checks. To cut down on overhead and push customers to their website, BIIA began offering credit card payments online. They replaced one problem (high overhead associated with paper checks) with another (drastically increased credit card processing fees).

Before implementing anything that looks like a quick fix, finance executives must evaluate the entire cash conversion cycle within the business. Flipping a switch that offers a fast solution is tempting but more complicated.

A wide range of systems and processes drive complexity in B2B payments, such as the sales order process, customer relationship management (CRM) tools, enterprise resource planning (ERP) platforms, and reconciliation processes, to name a few.

All these tools and processes connect with the enterprise cash conversion cycle in some way. Each step in the cash flow management process is essential to understand as part of the whole.

Step 1: Invoicing as a Critical Component of the Enterprise Cash Cycle

Invoicing is essential to business workflow because it lets customers know they owe your business money. If your customers don't know what they owe, your business probably won't get paid — which means it might not survive. Chaotic invoicing can lead to a poor customer experience, denting your cash flow. For businesses where some or all of the payment process occurs after the order is made, there must be a clear and concise way to let customers know they need to remit payment.

But let's take a step back. The first question finance leaders should ask is: "Does our company have an invoicing process?" Surprisingly, the answer might be "no."

One Paystand customer, a global real estate provider, found themselves in this scenario. For each home sale completed by one of their real estate agents, that agent was responsible for remitting a percentage of the profits back to the company.

However, the company didn't have a system to invoice the agents for payment. Instead, they waited for agents to send payments. This lack of process resulted in significant problems for the company, including unpredictable cash flow, slow remittance, confusing billing processes, and lack of payment visibility.

Generally, this is not the scenario for most businesses, and there is some sort of invoicing process. So the next question should be: "What is our invoicing process?".

The answers to this question will vary widely, as you can imagine. For example, an agricultural wholesaler used mailed invoices and paper checks for 100% of their payments. Their invoicing process was manual due to high invoice amounts (averaging around $50,000 per invoice) that would incur exorbitant processing fees if charged to a credit card.

Consider these questions to understand your business's invoicing process:

• What person or team is responsible for the invoicing process?
• What's the trigger that generates a new invoice?
• What information is included on each invoice?
• How is the invoice delivered to the customer?
• What are the customer's options to make a payment on the invoice?
• How can a customer resolve questions on an invoice?
• How does the company receive invoice payments?
• How are the invoice payments processed?

All the data you gather will help you answer the next big question: "How could we improve our invoicing process?".

Think about the problems your business has with invoicing today. Maybe payments are too slow, or fast payment options are too expensive. Finance staff may be spending too much time on manual processes. Systematic errors may cost the business time and money or lack visibility on payments for employees and customers. Finding the gaps means you can address them.

Each of our customers mentioned above took a look at the problems with their respective invoicing workflows and decided to make changes. As a result, BIIA Insurance installed Paystand's flexible payment gateway to provide online payments at much lower rates, cutting transaction costs in half.

The agricultural wholesaler used Paystand's payment gateway to convert 60% of paper check payments to eCheck. In addition, the global real estate provider launched Paystand's AR workflow (including invoicing) and saved $120,000 per year.

How much time and money could you save if you fully understood the enterprise cash cycle of your business? Request a demo to learn how Paystand can support your business's digital transformation.

Step 2: Streamlining Cash Flow Management with Improved Payments

With an informed perspective on all process parts, business leaders can recommend changes to optimize revenue.

Your first instinct about payment processing may be that your business has already digitized it. Every payment is recorded in your enterprise resource planning (ERP) system, and the ERP gives you digital access to all payment data and a variety of reports. That should mean your payments are digitized, but they're not.

Digitizing Payment Processing: More Than an Online Record

Digitizing payment processing means evaluating your business's payment options and removing as much manual work as possible — for both employees AND customers.

So, where do you start? First, take an inventory of all the payment methods your business offers. If you are tracking payments in an ERP or invoicing platform, this may be as simple as running a report on all payment types. Or you might have to do a bit of legwork and check payment types in multiple payment processors.

There's likely a mix of checks, ACH deposits, wire transfers, credit and debit card payments, and cash. Determine what percentage of payment methods are used for a given period. For example, let's say you are a $ 100MM-year business accepting payments across all payment methods. Your final tally might look something like this:

Imagine the enterprise cash cycle as a sandwich. The top slice of bread is invoicing (the outward request to remit funds), the sandwich filling is payment processing (the options offered to send payment), and the bottom slice of bread is reconciliation (communicating payment status back to the business).

Once you have all payment methods broken out per the appropriate time frame, it's time to run scenarios on all the possible payment touchpoints in your business. That might seem like a hefty chunk of work, so let's simplify things.

Payment processing connects the other two parts of the enterprise cash cycle (invoicing and reconciliation). Payments touch both the invoicing and reconciliation processes, so it's critical to understand how they interact with each other. Below are some sample scenarios for check payments:

Invoicing for check payments

• Scenario 1: The customer receives a mailed invoice, writes a paper check, and sends it to the business.
• Scenario 2: The customer receives an emailed invoice, writes a paper check, and mails it to the business.

Reconciliation for check payments

• Scenario 1: AR staff collect mailed paper checks daily and manually record them in the business's ERP.
• Scenario 2: AR staff collect mailed paper checks daily, run them through a scanner, upload them to the ERP, and check each record for errors.

Record these scenarios for each payment method, and ensure you capture them all. Credit card payments might be made via mailed invoice, phone, in-person, or online. Wire transfers might have varying steps based on the initiating bank.

As you're going through and capturing these use cases, you'll notice where manual work happens and where work is automated.

Make a note for "manual," "automated," or "both" for each. Knowing what type of work is associated with each use case will help you more easily evaluate them for change when the time comes.

Numerous Paystand customers have evaluated payment processing in this manner. Here's what a few of them learned about their process:

• During explosive growth, Covetrus still had many customers remitting payments via mailed paper checks and phoned-in credit cards.
• A school communication platform and an accounting system had no link between online invoicing and payment options.
• A worldwide technology leader used an expensive wire transfer process to confirm payments for cargo shipments. Despite the speed of wire transfers, payment delays incurred hundreds of thousands of dollars in monthly demurrage fees.

These businesses discovered where the gaps between manual work and automated processes were and what they were losing: time and money.

Calculating the real impact of your payment methods

So, you have a breakdown of payment methods, a list of scenarios, and their level of automation or manual work. Your next step is prioritizing your scenarios, first attacking the most significant problems.

Start by adding one data input to your payment methods: business impact.

For example, paper checks may impact your business in delayed payments and manual work, a cost that can be quantified as time-to-cash and manual effort. Wire transfers and credit card payments might be low manual effort and high transaction fees. ACH payments may have a one-time manual effort at the start but meager transaction fees for the duration.

Here's our previous payment methods breakdown with business impact added in:

We understand that this evaluation process is a complex exercise that takes time and effort. But know this: It will have wide-ranging impacts on your business. Have a look at the results the Paystand customers mentioned above customers received from scrutinizing their AR process and making changes:

Based on the data above, you'd likely evaluate the gaps in paper checks first, followed by credit card payments, ACH deposits, and wire transfers. As you assess by priority, ask yourself how to change processes to remove a business obstacle. This means investigating opportunities to replace paper checks with online options that introduce only nominal fees and eliminate manual keying, for example.

• Covetrus reduced their Days Sales Outstanding (DSO) by 80%, decreased transaction fees by 98%, eliminated inbound phone inquiries by 25%, and increased their customer base by 11% with zero new AR staff.
• The school communication platform and the accounting system reduced their respective DSO metrics as payment times dropped from weeks to days.
• The worldwide technology leader reduced per-transaction fees from $100 to $.50 and eliminated massive demurrage fees.

Given those results, what do you expect your business to gain by evaluating payment processing options? To learn more, watch our webinar on Making Payments a Strategic Advantage.

Step 3: Accelerating Reconciliation

Does anyone look forward to the month-end accounting close process? Given how long it takes, it's difficult to imagine the answer is "yes." Estimates on how long month-end closing can take range from barely manageable to incredibly arduous:

• CFO Magazine reports that of 2,300 organizations polled, the least efficient bottom quarter takes an average of ten or more calendar days to close the books.
• A case study on Griffin Technology found that manual closing took 30 days before launching automatic reconciliation processes.

A quick Google search for "How to reduce time spent on month-end close" yielded 204 million results. Houston, we have a problem.

The final part of our guide to digitizing the enterprise cash cycle is dedicated to reconciliation. How incoming payments are reconciled can drastically impact AR staff and the business. A confusing or non-standardized process can lead to cash flow problems, inefficiencies, and potential compliance breaches. But a sound, streamlined reconciliation process not only improves your access to capital but also improves your financial planning ability.

Consider the difference between manually keying in thousands of payments and automated workflows that take online payment information and tie it directly to the business's enterprise resource planning (ERP) tool.

In the first scenario, the ability to keep up with manual payments rests on the workforce, and there's room for manual error. Any staff interruptions can throw off the delicate balance of closing the books each month. In the second scenario, payments are automatically verified against ERP records. Human interaction is required to deal only with exceptions.

So, how do you get from a manual, time-consuming process to automated workflows that shave time off of month-end close?

Start by listing all payment types and how they are currently reconciled.

What you learn might surprise you. For example, paper check reconciliation will likely be manual — unless your business has invested in hardware that will scan checks, look for critical information, and send that data to pre-mapped fields in your ERP. But even these processes require manual intervention and are time-intensive. Moreover, electronic payments in the form of wire transfers, ACH deposits, and credit cards may seem like they should integrate seamlessly — but they don't. Why?

Certain initiating banks may directly connect with your ERP, while others may not. Transactions processed over the phone or in person may be considered manual transactions that lack a connection, or the credit card processor you use doesn't integrate with your ERP at all.

Whatever the case, it's essential to know where manual vs. automated reconciliation is happening. If there are distinct payment types within each payment option, make sure to separate them.

Having this breakdown makes it easy to create a plan of attack. Start with the highest percentage of transactions per quarter where reconciliation is manual and put the rest in order accordingly.

Get granular with the time your team is spending on each task

The next few inputs you need will come straight from your accounts receivable staff. If you're lucky, you might be capturing this data already. If not, asking your team to track their work for a handful of applicable transactions will do the trick.

• How long does it take to key in each payment type?
• What error-checking steps are performed for each payment type?
• How long does the error-checking process take for each payment type?

With the answers to these questions, you can calculate the time AR staff spend on manual reconciliation for each transaction type.

1. Transactions/quarter X minutes per keyed transaction = total time to reconcile payment type A
2. Transactions/quarter X minutes per error-checked transaction = total time to verify payment type A

The calculations above will show how much time you could save with automation. That means shaving big chunks of time off month-end close processes that can be reallocated to strategic activities supporting the business's financial health.

Now it's essential to take another look at the payment options that worked best in your payment processing exercise. Do those payment options connect directly with your ERP? If not, could you centralize payments into one platform that integrates with your ERP?

For your highest transaction volume, seek to reduce manual reconciliation with automated connections. You'll be paid back with a faster, seamless month-end close process. Remember Griffin Technology? By automating reconciliation workflows, they reduced their month-end close from 30 to 5 days.

Take Your Enterprise Cash Cycle to the Next Level

A digitized enterprise cash cycle offers businesses better operational efficiency, faster access to capital, an improved customer experience, and increased visibility.

But setting a firm foundation is the most crucial part of ensuring your digital transformation works. Mapping out your billing process, mainly focusing on parsing out the different steps of invoicing, payment options, and reconciliation, can help you pinpoint areas for improvement.

You can effectively position your cash management system for long-term gains with a complete understanding of the process, incremental change, and a suitable payment partner for your company.

Are you interested in automating reconciliation workflows and wondering which payment options are best for your business? Learn more about how to digitize your cash cycle.