Cash Velocity | B2B Finance Glossary

Jun 8, 2023 by Brandon Jones

What is Cash Velocity?

Cash velocity is simply a measurement of the rate at which money is exchanged between a merchant and a customer.


How Does a Business Calculate Cash Velocity?

To calculate cash velocity, divide cash flow by time. For example, if a company has a positive cash flow of $120 million per year, it has an average cash velocity of $10 million per month or $30 million per quarter.


Why is Cash Velocity Important?

Cash velocity is critical because it’s a metric that defines how quickly your business can get its revenue through the door – something that can be made or broken depending on your company’s financial solvency.

Think about this: if you’re waiting on a long DSO period to get the money owed and don’t have enough overhead to pay your current employees, you might have to shutter your company before your revenue even hits the bank. On top of that, as the outlook on the future economic landscape continues to worsen, cash velocity is becoming all the more essential.

Inflation, in particular, has created a dark cloud of fear for businesses and consumers alike – mainly because one of its most dangerous side effects is that it reduces purchasing power and makes it impossible to buy as many goods and services as consumers were once used to. As a result, individuals and corporations will have to choose how to allocate their funds, inevitably widening the gap between the haves and the have-nots.

Therefore, ensuring speedy cash velocity is essential to what matters most for your business: revenue.


How Does Cash Velocity Impact Your Business?

Now more than ever, early access to cash is critical to the enterprise's survival. At the same time, many industries and buyers are known to be slow to pay, DSO times feel unnecessarily long, and businesses lack the tools necessary to speed up time to cash.

AR departments are officially at the mercy of payers and have little recourse in accelerating payments to improve cash flow. For finance teams, cash flow is king, and understanding how cash velocity works and how to improve it can be game-changing for the financial health of organizations everywhere.


Tips for How to Increase Your Cash Velocity


Speed Up Your Time-to-cash

Today, finance teams know how mail float – the time it takes for a check to travel from payer to payee through the postal system – can drag out DSO time. In addition, checks can easily be lost in the mail or tampered with, and [payments made via paper checks are susceptible to fraud 74% of the time.

While almost every other element of the enterprise has gone digital, the fact is that B2B payments are still stuck in the days of pre-internet processes, take an unnecessarily long time to collect, and are prone to human errors. However, when it comes to increasing cash velocity, a few tools can improve DSO by as much as 80%, including auto collections, auto reconciliation, “pay now” links attached to email invoices, instant funds, and smart lockboxes.

With the right B2B payment processor, you can fully digitize your cash cycle and eliminate paper check payments. Auto collections, auto reconciliation, and instant funds mean that you can set up recurring payments and always know when to expect your funds to come in.

Some solutions integrate seamlessly with any ERP system and provide every feature you need to speed up your time to cash. In addition, Paystand’s Smart Lockbox is designed to unlock an entirely paperless cash cycle from payer to merchant, enabling a one-click migration experience for existing paper check payers that digitizes all future check payments.

Smart Lockbox also offers remote remittance processes that eliminate DSO and trips to the bank, gives immediate visibility into the cash flow through payment data displayed as it comes in, and offers a centralized collections process and reduced receivables risk with 24/7 payment tracking.

With the right digital payment solution, you can effectively increase your cash velocity and help your business collect its mission-critical revenue more quickly.


Automate Essential AR Tasks

How your AR team operates is another major factor that impacts your cash velocity. Today, finance departments still primarily rely on manual processes that take unnecessarily long time. In addition to keeping your team from focusing on strategic development and other tasks that would help take it to the next level, most manual AR processes also drain your company’s money because you’re required to spend an unnecessary amount of capital on human-intensive processes as opposed to substituting them with automated solutions. This inevitably slows down your finance organization and costs your business more – two factors significantly reducing your cash velocity.

Typical AR teams often deal with complex systems that include the following:

  • Invoice creation and presentment
  • Following up with multiple emails and phone calls until the invoice is paid
  • Signing contracts and underwriting with multiple banks
  • Sharing remittance information

After that, finance teams must keep track of paid and unpaid invoices with multiple banking partners, keep track of payments, and wait 7 to 15 business days for the payment to show that it’s been posted.

However, the best B2B payment offerings can reduce your AR staff costs by as much as 50% and help increase your cash velocity simultaneously. Plus, automated AR solutions can reduce internal fraud and human errors and allow your finance team to handle payments more securely (in fact, digital payments are far more secure than paper-based payments, especially regarding B2B transactions).


Reduce Transaction Fees to 0%

While online payments reduce DSO times significantly, credit card payments come with their own set of problems. Today, merchant fees can be as high as 3.5%, which means your business loses out on a percentage of your valuable revenue every time a customer pays you with a credit card. For B2B transactions (which tend to be much larger than consumer transactions), companies everywhere could be missing out on tens of thousands of dollars every time they attempt to collect revenue.

On top of that, interest rates continue to rise, and credit card companies have outsized influence when determining these rates. Finance teams need new solutions to help them protect their bottom line, which is why Paystand created its zero-fee bank-to-bank network.

This payment processing system integrates seamlessly with major ERP systems like Sage Intacct and NetSuite, making it possible for your customers to pay you instantly – and with zero fees. Not only will your finance team save on unnecessary transaction costs, but you’ll also save countless hours that would otherwise have been spent on manual processes.

Paystand’s direct-bank network is also the easiest, safest way to send and receive money, and it allows your finance team to do the following effortlessly:

  • Use Least Cost Routing (LCR) technology to help customers shift to zero-fee, digital payments.
  • Control costs while maintaining flexibility for customers.
  • Offer alternative payments that calculate customers’ savings in the checkout window.

If you want to learn more about increasing your cash velocity, you can schedule a demo with us here.