Maximizing Small Business Payment Efficiencies to Improve Working Capital Management

Maximizing Small Business Payment Efficiencies to Improve Working Capital Management
Unlocking the Power of Your Operating Cash Through Improved Payment Efficiency

As uncertainty around interest rates raises concerns for small businesses, the importance of maximizing payment efficiencies with the goal of improving working capital management has become more critical than ever. By freeing up “trapped” cash, you can reduce your business’s reliance on interest revenue and/or loans for daily operations, as well as for the pursuit of growth opportunities.

More effective working capital management that relies on increased treasury efficiency and effective supply chain finance practices holds the promise of treasury operations that are less beholden to the fluctuations of today’s interest rate environment.

Squeezing Every Ounce of Efficiency from the Financial Supply Chain

Examining the financial supply chain offers you an invaluable opportunity to increase efficiency and improve your working capital management. Gaining critical insights into the financial supply chain can allow you to take advantage of opportunities to work with your suppliers to maximize liquidity. This can be accomplished by looking at payment terms contained in the contracts between your business and supplier. By lengthening payment terms, also known as average days paid outstanding (DPO), you can make significant liquidity gains.

Suppliers may also be open to providing a discount in exchange for faster payments than those already agreed to on the invoice. In such cases, Fifth Third Bank can help by providing you with robust tools to capture discounts and determine the most efficient method of payment. Offering suppliers earlier payments for discounted terms is ultimately a win-win for both sides.

Another area of opportunity for driving treasury efficiency is by eliminating cumbersome manual paper processes, such as check payments, purchase order acceptance and acknowledgement, shipping notifications, and invoices, and replacing them with highly efficient electronic solutions. In addition to critical cost and resource savings, electronification can also automate the process of matching the purchase order price to the invoice receipt, creating further accounts receivables (AR) proficiency.

Through a careful examination of accounts payable (AP) and AR processes, you can evaluate payments terms and determine the best mix of payment types to meet organizational goals. This can have profound results. One such example was the case of a local school district which was experiencing a teacher shortage. But without additional funding, adding new teachers was simply impossible. However, after working closely with Fifth Third Bank, the school was able to improve its payables processes, which created significant cost saving efficiencies. By unlocking working capital, the school was able to hire two additional teachers – and no new funds were required.

Proactive Versus Reactive: Keeping Your Treasury Health in Check

While interest rates most likely won’t change dramatically for the foreseeable future, it’s impossible to state with certainty what tomorrow will bring. That’s why it’s a good idea for small businesses to be proactive, rather than reactive in their liquidity strategy. Fifth Third Bank can help you to gain a clearer picture of what your business is trying to achieve and help you be prepared no matter what happens with rates in the future.

We can help you increase the efficiency of your payables and receivables operations, serving as an invaluable resource and working with your organization to ensure you are taking advantage of the latest tools available to improve your working capital management. Together, we can monitor your processes and find ways to put more of your organization’s cash to work for the business, reducing reliance on credit lines. With the right working capital management strategy in place, your business will have better access to the funds needed to fuel future growth without having to borrow. 

The views expressed by the author are not necessarily those of Fifth Third Bank and are solely the opinions of the author. This article is for informational purposes only. It does not constitute the rendering of legal, accounting, or other professional services by Fifth Third Bank or any of their subsidiaries or affiliates, and are provided without any warranty whatsoever. Deposit and credit products provided by Fifth Third Bank.