Working capital is a crucial measure of short-term liquidity and provides a good assessment of the operational efficiency of a business by indicating how well it can cover its short-term obligations with its immediate assets.
Put bluntly, having strong working capital reserves increases the agility of a business to respond to day-to-day challenges and market changes, as well as providing a stable platform for growth. Conversely, low or negative working capital (where liabilities and short-term debts – such as accounts payable – outstrip the available cash inventory and accounts receivable) could mean that an organisation struggles to meet its short-term debts and operational outgoings.
One of the most effective ways of optimising working capital is by shortening the payment cycle through Automated Invoice Processing (AIP).
What Is Automated Invoice Processing?
Automated invoice processing is a software technology designed to manage and streamline the entire life-cycle of an invoice, from receipt to payment, with minimal human interaction. How the process works varies from platform to platform, but often involves the digital capture of invoice data through electronic mediums (e.g. PDFs), or, less commonly these days, by scanning paper invoices. The software then extracts key information such as the invoice number, amounts, and vendor details using Optical Character Recognition (OCR) or another data extraction system.
This data is then matched (automatically) against purchase orders or receipts on the system, sends the invoice for approval based on predefined workflows, and submits the payment for processing. Before automation, invoice processing was an extremely labour-intensive process in many organisations, requiring finance staff to physically sort invoices and receipts via email, post, or fax, log them manually into an ERP or accounting system; then manually verify and match each invoice against purchase orders and receiving documents, send them to the appropriate people for approval, and handle errors and payment schedules. Processed invoices then needed to be physically or digitally filed and archived for record keeping and future reference. Delays at any stage of the cycle could easily impact an organisation’s working capital, even if, on paper, they had sufficient liquidity.
The capacity of AIP to speed up the invoicing cycle is significant, with huge savings in processing speed, as well as fewer errors and increased overall accuracy. AIP can contribute to optimised working capital by ensuring that payments are made and received in a timely manner, speeding up the entire invoice processing cycle. This efficiency can also improve an organisation’s cash conversion cycle, which is the time needed for a company to convert its inventory assets into income from sales.
Next Steps
By embracing automated invoice processing, you can optimise your organisation’s working capital by creating a more agile, efficient, and resilient financial infrastructure. To find out more and discover how we can help, please contact one of the experts at Cogent Consulting today by calling +44 (0) 1536 262646.
