That’s why it is so important to develop a working capital management strategy to maximize cash flow, reduce reliance on short-term debt and pay for current liabilities and operating expenses. And one of the greatest opportunities to avoid a cash crunch is to ensure you have an enterprise payment strategy that is working in harmony with your working capital strategy.

Taking stock

The most important first step to take before making any changes to your payment strategy is to ensure you have a clear and solid working capital strategy. An enterprise-wide payments strategy must complement and support it. Have some clear goals in mind while looking at your working capital strategy, as these will become table-stakes as to the changes you want to implement with an enterprise payment strategy. Be sure when you are working on revisions to an existing working capital strategy that you look at more than just an income statement. You should truly develop and understand the cash conversion cycle—the link between your income statement and balance sheet.

Secondly, you need to formulate a baseline understanding of your current payments ecosystem. Look at both receivables and payables and begin an inventory of payment options, methods and channels, vendors, volumes and processes that you have in place. You will likely need to define this inventory separately by payables and receivables for each payment category that may require different and competing goals.

It’s essential to know how customers pay, how you pay your vendors, the barriers they may experience and how to go about fixing any problems that may exist today. Consider how long it takes to collect from customers, the timeframe from invoicing to payment (the relationship between sales and receivables), how long it takes to sell inventory (the relationship between the cost of goods sold and inventory), and how long the organization is given to pay its bills (the relationship between the cost of goods sold and accounts payable).

From a working capital perspective, define clear goals of what you need your enterprise payment strategy to produce, and also any additional goals, which may include improved customer service, competitive differentiation, costs of quality, reduction in transactional expense and labor savings as these will help define a strategy.

Receivables perspective

Start by analyzing the billing process as well as each payment method—ACH, check, card, etc.—and payment channels customers have available to them. Rely on in-house experts to answer the following questions for each payment method:

- How are customers invoiced?
- How long does the payment cycle take from invoice to payment?
- What percentage of sales volume does each method and channel represent?
- What are the transactional costs of each payment option?
- What are the challenges associated with each method and channel, from both a company and customer perspective?
- Have all methods been appropriately marketed?
- What isn’t being offered?
- Is each method being optimized?

In addition, take steps to understand how payments are being processed. Take an inventory of payment providers, their fees, their business strategy and the parameters of contracts. You need to understand how your existing payment strategy is either supporting or competing with your working capital strategy, and you need to understand the costs of your existing payment systems.

It’s also wise to determine the payment options offered by competitors. A competitive review could reveal reasons potential customers select one competitor over another.

Finally, review the nuances of the billing and collection procedures to better understand how payments are received, cleared and deposited and the labor costs incurred as a result. Pay particular attention to payment exceptions, which are often overlooked. Look at more than just an income statement. Develop and understand the cash conversion cycle.

Payables perspective

Start by analyzing your invoicing processes as well as the payment methods you use to pay your vendors. Answer these questions:

- Do quotes match related invoices?
- Is pricing clear and simple?
- Is there a formal dispute management process?
- Are you leveraging discounts?
- Have you categorized vendors from one-time to strategic relationships?

A microanalysis of business practices, operations and customer service functions will help answer the question, “What does success look like?” This ability to set goals will outline gaps between the current and desired end state. In addition, it will allow the entire team to collectively define a strategy and measures of success. This analysis is conducted best in a cross-functional team environment with participation from payment operations, customer service, information technology, accounting, finance and treasury so everyone is aware of the initiative, and all parties have a seat at the table. A collective strategy can be determined with buy-in from each functional area. In the most successful strategies, participation is key, but decisions need to be made that create a payment strategy that supports your working capital strategy.

Analyzing the data

The second step in defining an enterprise-wide payment strategy is to thoroughly analyze the data that is gathered and establish a true cost per payment method or channel and to identify the resulting payment float or cash-flow challenges or opportunities that each payment method or channel brings to your organization. By aligning your payments with common performance indicators across all payment types, you can objectively review your payments and help identify opportunities to define new strategies to support your working capital. The “30,000-foot-view” of payment processes will reveal opportunities to reduce the number of steps from billing to payment.

The fast-paced world of consumers and ever-changing vendor relationship demands that businesses keep an eye on the future. Why not make changes now? Business operations may work even more efficiently with the introduction of new strategies, while further supporting your goals in effective working capital management, making the end result well worth it.

Gregory Prince is a vice president and senior treasury management product manager in the Wholesale Bank at Fifth Third.

A longer version of this article appears in the March edition of Exchange:
http://www.afponline.org/exchange/

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