If improving working capital efficiency is on your CFO’s agenda for 2019 – and chances are good that it is – then paying suppliers electronically is something that your organization needs to consider.

Corporate liquidity stands at record levels in the United States, according to the 2018 CFO/Hackett Group Working Capital Scorecard.  In fact, cash on hand for the 1,000 largest U.S. companies rose last year by an eye-popping 17 percent, or $154 billion.  Some of that increase can be explained by a continued increase in Days Payable Outstanding (DPO) – the average amount of time for businesses to pay their suppliers.  In 2017, DPO among U.S. businesses reached its highest level in 10 years. As a comparison, DPO among U.S. companies stood at 40 days, CFO and Hackett Group report.

An increase in DPO is an improvement for businesses, while a decrease in DPO is a deterioration.   

How to extend DPO with certain virtual card programs

Buyers increasingly recognize that paying suppliers on very favorable terms is tantamount to offering free financing.  That’s one reason that most accounts payable leaders surveyed by the Institute of Finance and Management in 2018 expect their business to extend its DPO within the next three years.

While U.S. businesses have made tremendous strides in extending their DPO, many are still leaving significant cash on the table.  Consider that top DPO performers (companies in the upper quartile in their industry) pay suppliers 3 weeks slower than median performers, per CFO and Hackett Group.

Paying suppliers via virtual card is one way that businesses can close this performance gap in 2019.    

Paying suppliers via certain virtual card programs instantly extends a buyer’s DPO, without requiring any changes to existing payment terms.  Virtual cards are a 16-digit credit card number that’s created solely to pay for a single transaction at a predetermined amount, but without a physical card; invoices paid via card go through a buyer’s normal approval process.  Because buyers don’t pay for purchases made via card until the statement date, they extend their DPO by more than two weeks, on average.

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Extending DPO with card payments provides businesses with cash for paying down corporate debt, making capital investments, increasing research and development, or supporting growth initiatives.  

Extending DPO also opens the door to more early payment discount opportunities.  Many suppliers prefer to be paid early in exchange for a discount on the invoice-due amount.  In fact, businesses can offset the considerable cost of accounts payable overhead with early payment discounts earned on targeted spend.  Most CFOs want to increase the amount discounts or annual percentage rate earned.

Moreover, buyers can earn rebates from payments made to suppliers via virtual credit card.   The number of rebates available is tied to a business’ payment volume, so the more a business uses virtual cards, the more it is likely to get back.  The potential for rebates is substantial for many businesses, making the value of cash-back rebates earned a more meaningful metric for CFOs.

Accounts payable is an obvious focus when it comes to improving cash flow.

And paying suppliers via virtual card is a solution.  

Want to see how virtual card payments can help your business free up cash?  Contact ACOM Solutions at 678-638-7600 to arrange a free no-obligation consultation with one of our cash flow experts.

Find out how automating supplier payments will save you time and money.

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