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The Perfect Payment From a Receivables Perspective: Bringing Money In Quickly & Efficiently

This article is meant to speak to finance leaders in companies whose primary business is B2B.  I.e. you grant credit terms to your customers and those customers pay them upon receipt of an invoice.

You’re a member of your company’s finance team and you grant credit terms to your customers and those customers in turn then pay you back upon the receipt of an invoice. It sounds pretty normal right? The problem is there are many pain points that come from this payment process that could be hurting your bottom line.

Financial Ops leaders in today’s B2B marketplace have an overarching mission: bring in money from sales quickly and disperse money to our suppliers efficiently (sometimes this can be read as “as slowly as possible”). Optimize Cash flow. Reduce DSO.  Expand DPO. These are all components of the same basic strategy: you need money in the bank to fuel operations and if you have extra you can make money on that money.

The moral of the story is simple. There are a few practical methods that companies can employ to optimize the money coming in the door. It’s really the story of what one company is doing to promote as many frictionless payments from their customers as possible. We call these “perfect” payments.

Finance leaders at one of the most well known industrial manufacturing companies in the world (you probably use their products almost everyday) were facing a constant battle that every B2B supplier is facing:

  • Too many of their customer payments were coming in later than they wanted.
  • The payments they received were difficult to process and match to open receivables in their ERP.
  • Many of their customers were taking unauthorized deductions which further complicated payment processing.

Does this sound familiar? They are doing something about it.  They thought about their customer base pragmatically and defined which segment would impact their business most.  They then designed a company “payments” policy that catered to that segment of customers while achieving their objectives. It’s having a significant impact on their cash coming in.

Here are steps your company can take:

1. Define which segment of your customer base impacts your cash flow the most.

  • When I ask our customer base this question, I hear a variety of answers, as we have a lot of customers in a lot of industries. The one I hear the most is: “20% of our largest customers equate to 70%-80% of our revenue.”

    2. Define what characteristics an ideal payment is for your company & Receivables team. For this customer it was:

    • Received before terms were due. In fact well before terms were due (10 days after an invoice was generated).
    • They matched to the penny. No short-pays or over-pays. No surprises.
    • They contained perfect remittance that required zero manual effort to post into their ERP.

    3. Determine how to best incentivize that specific customer base to pay you in that manner. What levers can you pull?

    • In this instance, the vast majority of their revenue comes from customers in the Fortune 500.
    • Of those, almost every single one have automated their payables (think Ariba, Tungsten, Taulia, etc.). The net effect of this is that 3rd party companies (banks and card issuers) were responsible for issuing payments on behalf of these customers.
    • These ePayables companies make money on revenue share from credit cards (in the form of interchange) and ACH payments (in the form of fees associated with formats that embed remittance).

    4. Determine what tradeoffs are worth receiving a “perfect payment.” Then publish your corporate policy to the parties that matter.

    For the company in this scenario, it goes like this:

    Lever: Credit Card: i.e. giving up 200 basis points (2%) in interchange and processing fees:

    • In exchange for: We will accept virtual card payments (the issuers favorite form of payment) if they come within 10 days of an invoice AND if they do not contain short-pays AND if they are emailed to an inbox that is automates the processing and reconciliation of these cards.
    • Additionally, this company caps the total annual credit card fees they are willing to pay for processing any one customer’s credit cards.  If customers chose to go above that cap, they are assessed a surcharge in most states.

    Lever: Enhanced ACH: i.e. giving up 100 basis points (1%) in processing fees:

    • In exchange for:  We will pay to accept enhanced ACH IF it is within terms (net-30), does not contain a short-pay, and comes in a format we can auto-ingest (such as CTX).

    The net effect of this is millions of dollars in increased cash flow each month, huge reductions in DSO within their most important segment of customers, and a lot less manual matching work for their back-office. The 3rd party ePayables issuers that control payments are highly incentivized to ensure they facilitate payments in these two ways. Facilitating this type of customer billing relationship is a win/win for all parties involved.

    About the author:

    Justin Main is the Sales Director, Payment Solutions at Billtrust. He can be reached on LinkedIn.

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