This is the third in the series on how to develop a compelling business case for e-invoicing. The other articles in the series can be found here:
For a business case to be compelling, it needs to stack up on its own. It needs to pay for itself. And, as we’ve seen in the previous articles in this series, e-invoicing does pay for itself. Of course individual circumstances vary considerably and some business cases will be more compelling than others but there can be no doubt e-invoicing works.
Think about it. Companies invest hundreds of thousand of dollars – millions even – in back office IT systems. Even a medium sized company can find itself spending in excess of $1million just on an upgrade to it it’s finance system and that’s on top of the initial investment and ongoing support costs. Yet when it comes to sending an invoice, we take this $million investment to print out a piece of paper, put it in an envelope and send it to our supplier who copies the contents of the paper invoice into their $1 million investment.
When it comes to invoicing, the only concession we make to the modern world is the pre-glued envelopes rather than using sealing wax. Is it any surprise therefore that when we look into automating this process we find that we can save money.
But before you get too excited about the business case for e-invoicing, there’s something you should know – it gets better – much better.
The real benefit of electronic invoicing isn’t the cost saving. There’s lots of ways you can make costs savings. You can set up a shared service centre and leverage the economies of scale to reduce costs. You can outsource your AP department to make savings and to make even bigger savings, you can outsource to a low cost country.
But these measures only reduce the cost of operating in the same old inefficient way. Electronic invoicing delivers something further. It changes the game. It delivers control. And when you have control, you can begin to operate in ways that you could have imagined previously.
Reverse factoring is a great way to leverage an efficient and automated AP function.
Reverse factoring operates likes factoring whereby a supplier sells their outstanding invoices to a bank. The supplier won’t get full value but they will get their hands on the money quickly – within a few days. Reverse factoring uses the same principal but instead of the supplier selling the invoices to the bank, the buyer first agrees to pay the invoices. This gives the invoices greater value and allows the bank to pay the supplier early based on the buyer’s financial standing. This transaction, initiated by the buyer, is more cost effective than traditional factoring because the cost of credit, whether it is born by the supplier or the buyer, is based on the buyers financial standing. (For details on how reverse factoring works, go here.)
This arrangement allows a supplier to be paid in a few days while allowing the buyer to settle in their normal 30, 45, 60 day payment term. But it isn’t only useful for paying a supplier early.
Reverse factoring can be used to extend DPO (day payables outstanding). Instead of using this technique to pay a supplier early, the same method can be used to settle invoices in an extended period. For the same cost, instead of the supplier being paid in 4 days and the buyer settling in 30 for example, the supplier can be paid in 30 days and the buyer settle in 60. If the buyer’s normal payment terms are 30 days, this effectively doubles your DPO. When you consider that a day’s DPO is worth in the region of $2 million per billion of spend, this is a powerful cash flow management tool.
The really powerful thing about e-invoicing isn’t e-invoicing – it’s control – and control is of immense value.
There’s been lots of talk over the about AP becoming a profit centre and behaving more strategically but in reality this has, for many organisations, been merely an aspiration. By using electronic invoicing to deliver automation and control the aspiration can become a reality.
But it is only available to organisations that have their AP function in control.