EIPP: Cash Management on Your Terms

The market for electronic invoicing (e-invoicing) continues to grow, with recent surveys suggesting 20%-40% of organisations plan to implement invoice automation over the next three years. The key drivers are a desire for increased visibility and control, paired with a reduction in process costs and approval cycle times. However, maximum benefit only occurs when suppliers submit invoices electronically through a collaborative network, and getting suppliers to join these networks is a challenge. Yet it shouldn’t be.

The value proposition to the supplier is primarily two-fold:

  1. Reduced operating costs, such as no more mailing of paper invoices.
  2. The promise of getting paid on time, or even sooner, by agreeing to an early pay discount term.

For the buyer, such early pay discounts are more achievable than ever, thanks to the fast and efficient processing options of e-invoice presentment and payment (EIPP). Here again, the number of buyers using EIPP to take advantage of early pay discounts is comparatively small. A recent survey by Paystream Advisors, ‘Dynamic Discount Management Q112’, indicates only 31% of organisations see early pay discounts as a priority and even fewer suppliers are interested in offering discounts.

Why is that? Because buyers, many of them flush with cash right now, are still reluctant to part with their money, and suppliers are still hesitant to offer discounts for fear the discount will be taken even if not earned.

Perhaps it is a matter of trust. An early pay discount term is an offer, not a promise, of early payment. Suppliers must rely on the buyer to take advantage of the early pay discount and all too often, when cash is tight and suppliers need it most, buyers opt to give up the discount and pay later. Furthermore, the ubiquitous discount term of ‘2% 10, net 30’, while a great deal for the buyer, is quite costly to the supplier. By accepting a mere 2% discount for receiving the payment 20 days sooner, the supplier is offering the buyer a 36% return on investment (ROI).

Trade Finance

Other options exist for suppliers to get paid early at better discount rates and simultaneously allow buyers to maintain or extend terms. Trade finance, for example, is a viable alternative. In this scenario a financial institution, such as a bank, steps in. Upon invoice approval, the bank pays the supplier minus a financing discount. The buyer then pays the bank the full invoice value at an agreed on date in the future.

The buyer benefits by stabilising cash outflow and either maintaining or extending days payable outstanding (DPO). In addition, the buyer no longer needs to be in the business of negotiating and maintaining discount payment terms. The supplier, in turn, is guaranteed early payment and typically at a much lower discount rate. Trade finance thus makes early payment the choice of the supplier, rather than the buyer. In this scenario a supplier will be much more interested in joining an e-invoicing network.

What this means is that buying organisations need to look at their payables holistically. A silo approach that focuses purely on e-invoicing or electronic payments (e-payments) will produce minimal results. Only when process automation is coupled with a working capital strategy that considers both the needs of the buyer and supplier will adoption and subsequent benefits be maximised.

Working Capital

More effective cash management is the best reason to consider EIPP. Every dollar saved in operational efficiency and every dollar freed through DPO extension is extra working capital to apply to your organisation’s true mission: investing in the business and not in the payables.

Another key benefit of an EIPP solution is that it allows organisations to select as much or as little automation as they want. The technology is flexible enough to grow as a customer’s needs change, or as they and their suppliers grow more comfortable with automation.

For example, sellers can use EIPP to submit invoices electronically or via paper. In this way, buyers can implement and benefit from EIPP without relying on their suppliers to change their processes. Buyers can continue to receive paper invoices, which the bank then standardises and presents in a format that can be queried.

Once invoices are electronic, with EIPP using customer-defined workflow functions and business rules to simplify the entire approval process. Customers can set up automated approval tolerances and/or manual review thresholds. They can further enforce corporate policies by building workflow around the organisation’s approval hierarchy and the user’s signing authority and role.

These automated business rules also identify audit exceptions, such as duplicate invoices, prior to payment. When exceptions are flagged, customers can use EIPP to automate exception management, ensuring invoices are audited and suppliers are validated before any payment is made. And while suppliers do not need to join the EIPP network, a major benefit to them is the ability to login to review invoice statuses in real time and work collaboratively to resolve disputes or exceptions.

EIPP also automates payment by combining the customer’s separate payment processes, whether they are issuing cheques or sending e-payments, into one electronic process.

Conclusion

EIPP adoption is rising at a rapid pace. Industry data, such the ‘Paystream E-invoicing Adoption Benchmark Report Q112’ indicates that about one in five organisations have adopted EIPP tools, and the pace is projected to accelerate in the next three years. With the proliferation of alternate settlement and supplier financing options, EIPP is on its way to reaching critical mass. The time for your organisation to explore EIPP is now.

 

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