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How to Digitize the Enterprise Cash Cycle, Part 2: Payments

March 14, 2019 by Scott Campbell

In our previous post, we talked about the importance of looking at the enterprise cash cycle as a whole to get a better understanding of how it functions today. Armed with an informed perspective on all parts of the process, business leaders can then recommend changes to optimize revenue.The first part of our review scrutinized invoicing, which covers communicating to customers what they’ve purchased and how much they owe. So what’s the next logical step? Payment processing, or the options available to customers to make payments.

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. The ERP gives you digital access to all payment data and a variety of reports. That means payments are digitized, right? Wrong.

There’s more to digitizing payment processing than just an online record.


Digitizing payment processing means evaluating all of the payment options your business offers 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 a to do a bit of legwork and check payment types in multiple payment processors.

Whatever the case, there’s likely a mix of checks, ACH deposits, wire transfers, credit and debit card payments, and possibly even cash. Determine what percentage of payment methods are used for a given time period. Let’s say you are a $100MM year business accepting payments across all payment methods. Your final tally might look something like this:

Payment method Total volume / qtr % of Total
Checks $5 MM 20%
Wire transfers $1.25 MM 5%
ACH deposits $9.0 MM 40%
Credit card payments $8.75 MM 35%


Imagine that the enterprise cash cycle is 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 remit 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 timeframe, 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 a bit.

Payment processing is the filling that 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. Below are some sample scenarios for check payments.

Invoicing

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

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

Reconciliation

  • Scenario 1: A/R staff collect mailed paper checks each day and manually record them in the business’s ERP.

  • Scenario 2: A/R staff collect mailed paper checks each day, run them through a scanner, upload them to the ERP, and check each record for errors.

Record these scenarios for each payment method, and make sure you capture them all. Credit card payments might be taken via mailed invoice, over the 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 probably notice where manual work happens and where work is automated. Make a note for “manual”, “automated”, or “both” for each one. 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 along the way:

  • During a time of explosive growth, Covetrus had a large percentage of customers remitting payments via mailed paper checks and phoned-in credit cards.

  • A school communication platform and an accounting system both had no link between online invoicing and payment options.

  • A worldwide technology leader was using an expensive wire transfer process to confirm payments for cargo shipments. Even with the speed of wire transfers, payment delays incurred hundreds of thousands of dollars in drummage fees each month.

These businesses learned where the gaps between manual work and automated processes were and what they were losing as a result: time, money, and some cases, both.

Calculating the real impact of your payment methods can be eye-opening


So, you have a breakdown of payment methods and a list of scenarios and their level of automation or manual work. Your next step is to prioritize your scenarios so you attack the biggest problems first.

Start by adding one data input to your payment methods: business impact. Paper checks may impact your business in delayed payments and manual work. That cost could 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 very low transaction fees for the duration.

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

Payment method Total volume / qtr % of Total Business Impact
Checks $5.0 MM 20% High
Wire transfers $1.25 MM 5% Medium
ACH deposits $9.0 MM 40% Medium
Credit card payments $8.75 MM 35% High


We understand that this evaluation process is a complex exercise that takes time and effort. But know this: it will have wide-ranging impacts for your business. Have a look at the results the above-mentioned PayStand customers received from learning more and making changes:
Based on the data above, you’ll likely decide to evaluate the gaps in paper checks first, followed by credit card payments, ACH deposits, and wire transfers. As you evaluate by priority, ask yourself how you could change processes to remove a business obstacle. That means investigating options 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 completely eliminated massive drummage fees.

Given those results, what do you expect your business stands to gain by evaluating payment processing options? To learn more, watch our webinar on Making Payments a Strategic Advantage in 2019.

Read the next post in our series: How To Digitize the Enterprise Cash Cycle, Part 3: Reconciliation

Tags:   Payments, Payment Solutions, AR, automation, Business Process Management