How to make payment optimization a critical working capital management strategy

Businesses that succeed in compressing the cash conversion cycle and managing accounts payable will unlock multiple benefits. Released cash can fund investments or reduce borrowing. An overview of the organization’s cash flows supports business planning. Stronger working capital management provides the foundation for future growth.

For Finance leaders, there is an opportunity to turn their function, historically regarded as principally a cost center, into an engine to drive profit. Stronger working capital management can increase the flow of resources to every part of the organization, with Finance acting as a strategic control. Payment optimization is the most effective route to delivering this outcome.

How, then, to get started? For Finance leaders under increasing pressure to deliver measurable results, the following key points constitute a roadmap.

Define the business outcome and the process required to secure it

The key to successful payment optimization lies in the groundwork. That means setting clear objectives – in this case, improved working capital management – and then identifying the roadblocks preventing you from reaching them. Then, you can build a strategy for clearing those roadblocks.

“The first step is understanding your current environment,” recommends David Nielson, Payment Sales group head, Middle Market at U.S. Bank. “That means having visibility across your vendor relationships, the flow of payments in and out of the business, and the processes supporting those transactions. With that foundation in place, you can make more informed decisions about where there may be opportunities to improve.”

One common challenge for businesses is data management, with key information often decentralized and fragmented. For example, individual business subsidiaries may receive key payment data before the parent company. Even simple steps such as introducing a common naming convention for all payment-related files can help, suggests Nielson. With such a convention in place, Finance teams can locate key information more easily. Businesses could then consider investing in technology solutions such as an invoice management system.

Cleaner data will smooth the flow of payment processes, but most businesses will want to consider a complete overhaul of those processes, especially if there has been significant business growth since they installed them.

A thorough review to identify real pain points is critical. Transactions that might have once triggered additional interventions, for example, could now be considered too small to warrant guardrails. Payments requiring multiple handoffs could be simplified. Manual elements of the process may be slowing reconciliation and could be automated. “Even little tweaks will create capacity for the organization to work on bigger things,” adds Nielson.

Segment your suppliers to maximize working capital management gains

Every business will work with suppliers and customers of all shapes and sizes. Taking the same approach to all of them does not make sense. A segmentation approach will deliver the greatest gains, with payment methods matched to specific groups in order to unlock proportionate value.

This requires a coordinated and collaborative effort across the business. Procurement teams with a strong understanding of the organization’s suppliers will provide critical intelligence on how changes to payment methods or terms could impact these relationships. Accounts payable teams will have the clearest view of customers’ current payment preferences and where improvements might be possible. Technology teams will also play a vital role in delivering change by working with both suppliers and customers.

Segmentation is as important when dealing with new partners as with existing customers and suppliers. Identifying the right approach at onboarding stage is critical. For some customers, moving away from checks or requiring shorter payment terms may assist compression of the cash conversion cycle. For others, such an approach could undermine a burgeoning commercial relationship. Such a weighing up is also required on the supplier side.

In this context, payment optimization becomes a balancing act between seeking to make the process as convenient and efficient as possible and keeping the imposition on suppliers and customers within reasonable bounds. Their willingness and ability to transact in this way and their importance to the business will be crucial considerations in how Finance seeks to set that balance.

A practical approach starts with open communication, says U.S. Bank’s Nielson: “Building trust isn’t about one conversation. It comes from understanding each other’s priorities, being transparent about what you can deliver and consistently following through over time.”

Sequence payment method changes to drive working capital optimization

While businesses are setting ambitious goals for payment optimization, it’s important not to become overwhelmed. “We think in terms of breaking up the business’s different activities, as each one will have separate workflows and processes. We then put [a different] solution in place for each of them,” adds Nielson. “You don’t have to solve it all in one swoop.”

One option is to think in terms of business-to-business (B2B) payables and receivables and business-to-consumer (B2C) payables and receivables. But leaders should bear in mind that not all businesses will work with both B2B and B2C partners, and some organizations may choose to break down payment optimization in a different way.

While each improvement will increase efficiency, gains will be incremental. Some organizations may choose to focus on a single payment activity at a time, only moving on to the next when they are fully satisfied with the changes made. Others may progress different payment optimization workstreams simultaneously.

The sequencing of transformation will also vary. Some organizations focus initially on receivables management, where the scope for compressing the cash conversion cycle may be greatest. For others, it may make more sense to concentrate on accounts payable.

One consideration, particularly as organizations move away from checks toward electronic payments, is which transactions require manual authorization and which can run fully automated. It will also be important to vet customers and suppliers appropriately.

A strong awareness of fraud prevention at each stage is also critical. “There is a continual balance to strike between efficiency and security,” says Nielson. “That requires an ongoing conversation about which controls are appropriate.”

Build a solid digital payment infrastructure

“As businesses grow, visibility becomes increasingly important,” says U.S. Bank’s Nielson. “At the foundation is reconciliation: having a clear understanding of the money coming into the business, the money going out and how those transactions are being managed. That visibility gives businesses greater control as they grow.”

A key element of payment optimization will be moving away from legacy systems to new technologies that deliver better outcomes. However, while modern digital payment infrastructure promises to give organizations much greater visibility of money flow, a gradual approach may be the way to achieve this sustainably.

From this basic position, businesses can take digitalization to the level they choose. It might start with principally manual integrations, where businesses are uploading transaction details from their business systems. Equally, those with tools such as enterprise resource planning (ERP) and customer relationship management (CRM) software may move toward batch processes. Increasingly, businesses are starting to make use of application programming interfaces (APIs) – software tools that can constantly check their systems to help manage payment processes.

Modernization naturally carries a cost. Businesses may need to invest serious amounts to get their IT functions up to speed. Understanding the value of innovation to each individual business is important because the gains are real. Innovation not only offers greater control and flexibility, enhancing working capital management, but also transparency. Consolidated reporting, for example, provides the business with a better flow of information to enable forecasting and analysis.

Quantify your results and hone your working capital strategies

Payment optimization won’t be a one-and-done exercise. Continuous improvement will drive ever-increasing working capital management gains. “The roadmap is critical,” says Nielson. “We’re trying to build a continuum where there is always a portion of the budget dedicated to process improvements in Finance.”

Businesses make changes, measure the results, and then adjust accordingly. This becomes a looped process to drive ongoing progress. They must set clear metrics for assessing payment optimization. On receivables, for example, this might be a measure as simple as days sales outstanding or the speed at which the business’s invoices are settled. On accounts payable, the calculation will weigh working capital benefits against the cost of transactions.

Measurable progress on reconciliation is also important, adds Nielson. “Many companies are unable to complete a timely month-end reconciliation,” he warns. “That leaves them open to increased fraud risk, as well as to problems such as suppliers imposing late fees when they don’t receive payments on time.”

The bottom line: Incremental change can still bring quick results

Payment optimization is a multifaceted challenge. Cash is trapped in receivables, fragmented accounts, and paper-based supplier payments; the manual processes are stretching the cash conversion cycle; check fraud is rising. Businesses must address all these issues.

There is no silver bullet for these problems, and investment in technology alone won’t deliver the hoped-for gains. Digitalization can only do so much for organizations still struggling with inaccurate data, weak processes, and misalignment of the Finance, Technology, and Procurement functions.

Nevertheless, for those that are clear on their goals for working capital management, quick wins are on the table. Payment optimization offers rapid improvements in liquidity and increased rebate revenue, reduced fraud exposure, and greater capacity for strategic planning. A clear direction and a measure of strategic patience will set businesses on the path to these benefits.

Whether you’re looking to optimize payment processes, improve liquidity, or strengthen working capital management, our team is here to help. Connect with a U.S. Bank payments expert to explore your options.