e-Invoicing is a reality…and a source of great liquidity!

e-Invoicing is e business reality

Within 2 years, electronic invoicing will have reached critical mass and become entrenched:  67% of survey respondents already receive e-invoices from suppliers; 35% of firms send e-invoices or expect to within the next 12 months.  By the end of 2010, all public administrations in Italy will require e-invoices from suppliers. Increasing trends towards supply chain integration and dynamic networks will drive adoption rates even further.

Whether the intention is to adopt immediately or within the next few years, companies need to accept that e-invoicing and e-payments will soon be a reality of the business ecosystem.  They should begin to analyse how it will impact their business and make initial changes to the financial supply chain preparing for the smoothest possible transition.

  • Payables and Receivables metrics should be tracked to identify problem areas and the full financial impact of adoption on the cash conversion cycle;
  • Working capital should be analysed to determine what changes could be made to receivables and payables processing to reduce permanent working capital and the weighted average cost of working capital to its lowest sustainable level.  This may include special financing for seasonal spikes in working capital.
  • A dialogue should begin between buyers and sellers to identify the minimum requirements, industry standards and technology models that would best suit as many of  the stakeholders as is desirable;
  • B2B market, vertical integration and dynamic network initiatives should be considered to gain the most benefit from adoption; and
  • Logistics integration or outsourcing should be evaluated.

90% of payments are already e-payments.

Whether by the corporate administrator or by the bank’s teller, all non-cash payments are sent and received electronically.  What is a bonifico other than a wire transfer? Cheques are processed and cleared by computerized bank networks.  Ri.Ba and RiD are merely direct debit or seller initiated e-payments.
The fundamental differences between the traditional method and e-business method are the level of automation in the process and the costs incurred.

Viewed in its simplist form, electronic payments reduce costs and bridge the gap between corporate systems and bank networks.  There is little difference between the evolution of e-payments and the adoption of email.  Email is a natural development of the transition from handwriting to wordprocessing.  With the document in digital form, it makes little sense to print and mail a letter.  Email is quicker, more convenient and much easier to organize.
Likewise, electronic payments are a natural development of technology changes within the company and among the partners with which they trade.  With receivables and payables already computerized, it makes intutive sense that the most efficient and least error prone means to settle accounts should be in the same form especially given that the bank payment network is automated, as well.


It’s all about liquidity…stupid!

A recent analysis of the income statements and balance sheets of large US and European corporations found that, on average, firms tie up 20% to 30% more cash in working capital than necessary.(REL Consultancy Group, GTNews) Working capital is employed in inventory and receivables.  Any reduction of the combined days on hand releases capital that could be used for other purposes.  The concept is especially important to SMEs whose working capital is typically funded with equity and, therefore, costly.

Due the complexity and time consuming nature of invoicing, companies that process orders in real-time often produce invoices only once a week.  Any process that makes invoicing as simple as creating an order can reduce receivables working capital needs by a minimum of 3 days merely by processing invoices daily rather than weekly. For companies on a monthly invoicing cycle (often SMEs), the working capital released could reach 15 days or 4,10% of sales.

A company that produces invoices once a week or month is actually funding inventory that is no longer in its warehouse but rather in client’s.  In a typical example, goods are shipped on day 1 and the order is passed to administration for invoicing.  The goods are in the possession of the client while the supplier is still showing the same goods in inventory (from an accounting perspective).  On day 7, the invoice is produced and delivered, triggering the trade terms for payment.  In this case, a process gap of 6 days exists between trade terms and actual settlement.

The same may be true on the payment side, as well.  Given that many companies pay bills monthly but receive bills throughout the month,  invoices are often paid in advance of terms or in excess.  If payments are made earlier than required and no discount is received, the paying company is unnecessarily using it’s working capital.  If it pays later than required it may find itself accruing late payment penalties unnecessarily.

This is one of the reasons why the benefits of e-invoicing and e-payments are not always readily visible in operating cash flows.  The money that is released is in working capital rather than cost savings.

From a pure operating cycle, in manual processes reconciling stocking reports and inventory accounting is complicated due to the amount of goods shipped but not invoiced.  In a semi-automated process, a holding account is used to track goods shipped but not invoiced providing immediate visibility of permanent non-producing working capital investment.  Under pure automation shipping is a trigger event producing a draft invoice ready for checking and approval reducing the timing gap to minutes or at most one day.

excerpted from a Study performed for the European e-Business Lab.  For the complete report, see http://celeris-group.com/www/