What is cash velocity, and why does it matter for your business?

Sep 15, 2022 by Sage Thee

AR teams everywhere know that cash velocity is important. That’s because this metric defines how quickly your business can get its revenue through the door – something that can be make or break depending on your company’s financial solvency. Think about it like this: if you’re waiting on a long DSO period just to get the money that’s owed to you and you don’t have enough overhead to pay your employees, you might have to shutter your company’s doors 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.

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. However, before getting into more detail about how you can speed up your own company’s time to cash, let’s be sure to get a clear understanding of what cash velocity is: cash velocity is simply a measurement of the rate at which money is exchanged between a merchant and a customer. To calculate cash velocity, just divide cash flow by time. For example, if a company has a positive cash flow of $120 million per year, that means it has an average cash velocity of $10 million per month or $30 million per quarter.

So, why does this matter, and what can your finance team do to significantly decrease your DSO? Here, we’ll discuss how you can increase your business’s cash velocity and dive into the importance of integrated AR and payment automation.

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 in the postal system — can drag out DSO time. In addition to this fact, checks can easily be lost in the mail or tampered with, and payments made via paper check are susceptible to fraud 74% of the time.

While almost every other element of the enterprise has gone digital, the fact of the matter 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, there are a few tools that 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’ll be able to fully digitize your cash cycle and eliminate paper check payments altogether. 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. Similarly, “pay now” links can also be embedded into email invoices so that you don’t have to wait on paper-heavy payment processes.

There are even solutions – like Paystand’s integrations for NetSuite and Sage Intacct – that integrate seamlessly with your ERP system and provide every feature you need to speed up your time to cash. In addition to that, our Smart Lockbox works effortlessly with most major ERP systems. It’s designed to unlock a fully paperless cash cycle from payer to merchant and enables 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, immediate visibility into the cash flow through payment data that’s displayed as it comes in, and 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 where it counts most: collecting revenue.

Automate essential AR processes

Another major factor that impacts your cash velocity is how your AR team operates. Today, finance departments still primarily rely on manual processes that take unnecessarily long amounts of 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 on human-intensive processes as opposed to substituting them with automation solutions. This inevitably slows down your finance organization and ends up costing your business – two factors that greatly reduce your cash velocity.

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

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

After that, finance teams have to keep track of paid and unpaid invoices with multiple banking partners, keeping track of payments, and wait 7 to 15 business days for the payment to show that they’ve 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 at the same time. 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 when it comes to B2B transactions).

When choosing a B2B payment provider for your company, be sure to select one that will allow you to fully automate billing, payment, cash application, and reconciliation. This can be done through features like autopay, Fund-on-File tokenization, one-click checkout, and auto reconciliation. By knowing what you need to look for to get the job done, you can make the best decision for your finance team when it comes to choosing a B2B payment solution – and speed up your cash velocity in the process.

Eliminate fees that drain your bottom line

What many finance teams don’t realize is that current B2B payment processes are riddled with unnecessary fees. Paper checks also have a number of indirect costs associated with them, including labor and processing fees. Bank of America estimates that a check can cost you anywhere from $4 to $20, based on the check price and postage – and those costs don’t include the time your finance team spends writing, mailing, collecting, and reconciling the check payment itself. That means, if your business is processing 5,000 paper checks per month, you could be spending as much as $480k annually on collecting your own business’s revenue via paper checks.

On the other hand, while credit card payments might seem like a less expensive alternative to paper checks, they’re actually tied to punitive transaction fees that can be costing you as much as 3.5% on every payment. Clearly, both checks and credit card payments are impeding your cash velocity, and finance teams everywhere need to turn to new solutions that eliminate archaic processes and unfair transaction fees.

Paystand makes it possible to access zero-fee, direct-bank payments. With this functionality, you’ll be able to eliminate ever-rising credit card fees via payer incentives. You’ll also be able to forget about convenience fees and the hidden costs associated with paper check payments. Paystand also offers a DeFi Corporate Card that allows you to provision cards for your team members instantly, designate expense categories, and track spend by account, class, and category. You can even earn rewards in bitcoin!

When it comes to increasing your cash velocity, there are many tools at your disposal. If you’re ready to explore how you can speed up your time to cash and ditch punitive transaction fees for good, you can schedule a demo with one of our payment specialists today.