That’s the principle behind invoice factoring for small businesses, a trend that’s on the upswing.

Small business is the heart and soul of our economy. More than 99% of U.S. employers — 25.8 million — are small businesses.

With today’s economy, payments are running later than ever. This can greatly harm a company’s ability to take on new customers, and even to secure the most competitive rates from its own suppliers. It also makes it more difficult for these businesses to pay their suppliers on time.

Accounts receivable factoring attempts to build a bridge over this gap for small business financing. The factoring firm provides what is essentially a short-term loan.

When the company’s billing period ends, it re-pays the factor.

There are three steps most accounts receivable will do before initiating a business relationship with a new customer:

• Accept only one invoice for the first transaction, while the factor does due diligence
• Check the credit of the debtor listed on the invoice, and
• Confirm that the sale actually occurred.

Sure, you already work together in many ways. You’re certainly not working against each other.

But there are three ways you can reinforce the bonds that keep this team performing at a high level.

The final result is a win-win-win: Procurement, A/P and your entire company all benefit.

• Get on the same page. One of the biggest problems in getting payments in or out of your business can be invoice keying errors. Even the best number-punchers and crunchers will occasionally tap the wrong key — sometimes that’s all you need to create a large headache. Try this: Ask suppliers to repeat purchase order numbers back to buyers when placing phone orders. At the same time, include a clause in your contract that requires suppliers to match up invoice line numbers to line item numbers.
• Finding the best terms. Given today’s business conditions, you might want to re-open the door on negotiating standard payment terms with suppliers. Team up with your A/P folks to identify optimal payment terms. Are there early payment discounts you should be taking advantage of? Are there ones you might want to stop?
• Notify the proper authorities. It seems every business has its share of renegade (non PO) transactions, which inevitably fall to A/P for resolution. Catalog these strays and make sure each group is getting the proper review necessary before approval. This increased visibility has been proven to reduce renegade buying and save businesses money.

Much of what you’ve suspected is being confirmed as reality:

• Of the small businesses that offer credit, 52% say customers are paying invoices more slowly than they were a year ago, and
• 24% of those same businesses report that they are slower to pay their own creditors.

Of course, these trends have initiated ripple effects through virtually every aspect of conducting business.

Purchasing and Procurement people are more likely than most to feel the squeeze.

According to Decision Analyst’s Small Business Recession Effects survey of companies with less than 100 employees, the good news is that conditions aren’t worse for small businesses.

For example, while 23% of small businesses say there’s not enough credit available for them, there are 77% of small businesses that are comfortable with available credit levels.

Small businesses were asked what steps they plan to take in the next three months to help reduce expenses.

Among the answers:

• Reducing supply orders: 29%
• Holding off on buying equipment: 23%
• Switching to less-expensive suppliers: 20%
• Increasing prices: 17%
• Reducing inventories: 16%

Even if you’re pretty sure it is, how could you prove that to someone else in your company?

The best way to do that, of course, is to measure it. After all, if you can measure something, you can improve it.

But in order to measure aspects of your performance, you need to determine what’s worth measuring and what your targets should be.

Experts suggest focusing on these five aspects of Accounts Payable:

• time it takes to process each invoice
• the percentage of invoices paid on time
• time on the job spent managing disputes, reconciling discrepancies and processing exceptions
• number of invoices processed by each A/P staffer in a given period of time, and
• percent of your invoices that qualify for early pay discounts

Decide on a fair time period to measure “average” performance and establish normal performance benchmarks.

One major influence on A/P performance is how much technology has been integrated into your system. Obviously, the more automated A/P operations are, the smoother and faster they should run.

Still, the Aberdeen Group offers guidelines as a suggestion.

Aberdeen breaks down A/P performance into three categories: best in class — the top 20%, industry average — the middle 50%, and laggards — the bottom 30%.

• Best in class:  $4.60 to process an invoice, taking an average of 4.4 days
• Industry average: $12.20 to process an invoice, taking an average of 14.4 days, and
• Laggards: $55 to process an invoice, taking an average of 34.4 days

Your company works hard every day to meet 21st century challenges — but it may be trying to do it still using 19th century A/P practices.

Invoice processing is utterly critical to the success of most companies. It’s also a job that consumes large chunks of Procurement and Purchasing time.

One big reason that invoice processing takes so long?

It’s still, for the most part, paper-based. It’s estimated that 70% to 80% of all invoices still take the mail or fax route. Toss in paper-based recordkeeping and manual data entry and workflow, and it’s no wonder A/P practices are so far behind the times.

The most successful A/P departments have taken steps to automate specific functions.

While there’s an initial cost to automating invoice processing, in most cases it quickly pays for itself.

Among the benefits:

• Cheaper to process invoices. Automated invoicing will trim 33% to 37% from processing costs; it also has helped some companies reduce the number of employees dedicated to A/P.
• Gets you paid faster. Automated A/P processes reduced invoice payment cycle time from an average of 34.4 days to 4.4 days.
• Increased visibility. Usually, you can access invoice status information at any point during the process.
• Staying legal. Automated invoice processing makes it easier for your company to comply with corporate and government financial filing requirements.

Sure, none of this is going to happen overnight.

It’s a big decision for a company to commit to more A/P automation. It’s especially challenging because most companies that lay out the bucks want to see the benefits immediately.

But the most successful implementation occurs one stage at a time. It’s like building blocks, where it’s critical to lay down a solid foundation before you start building upward.

One idea? Start keeping a log of instances when it would’ve been a clear advantage — and money-saver — to have an automated process in place, instead of a clunky, paper-based system.

There are four ways you can turn this into a real “you-scratch-my-back-and-I’ll-scratch-yours” relationship, not just a paper partnership.

• Put in a good word. Suppliers have competition just like you do. Want to help give them an edge? Offer a customer testimonial they can use as a reference or in marketing materials.
• Fewer bells and whistles. Maybe, once upon a time, you required specialized, customized treatment from your suppliers. Is it still a valid need? There might have been changes on your end — or with your customers — that could reduce suppliers’ hands-on time.
• The check is (really) in the mail. Everyone benefits from smoother cash flow — suppliers, too. Are there any potholes that delay payment to your suppliers? What can you do to reduce the time between invoice, accounts payable, and your supplier’s A/R department.
• Think big picture. Are there suppliers you should consider locking down into a multi-year deal? This pays off for suppliers, too, with the prospect of guaranteed future income.

Your peers in Purchasing/Procurement have three main concerns about what happens with invoice automation. Fortunately, since others have been out there clearing the way, there are now three reasonable explanations for each of these complaints.

Too much money. One reservation is that the cost for Accounts Payable to implement and administer automated invoicing is too high. Take a step back for a moment and look at the stacks of paper and tons of files, that all must be handled manually; data entry; matching PO invoices — and exceptions, not to mention what you do with deductions and discrepancies. Whew — talk about labor intensive! Research done by AberdeenGroup estimates the average cost of manually processing invoices is $21. But companies that automated invoicing functions saw that price drop to an average of $10 per transaction — and only $2 in some cases.

Too much time. Installing a new system, learning how to use it, working out the bugs, training others … Wait — think about it for a minute. How much time does it take to manually enter data, manually validate PO invoices, send information around to different people in your office — and wait for the proper paperwork and necessary aprovals to to come. Once your automated invoicing is up and running, you’ll streamline most of these processes, and that frees up A/P people to tackle more significant challenges.

Too many errors. Thanks to the ability to scan documents and store the images as electronic files, you slice the margin for error. There are so many sources for introducing errors when handling invoicing manually: mis-keyed strokes, duplicate payments, mis-coded invoices. Automation will remove the threat of human error from many of these processes. 

There are four areas where change — progress – is impacting the way that businesses collect receivables.

The focus for businesses is still the same: Collect the customers’ money. But changing economic conditions have created the need to modify the techniques for bringing in cash. What worked yesterday won’t work today; what works today might not work tomorrow.

1. Less Cash, Please. Believe it or not, it’s costing companies more money to accept cash. There’s the time it takes to handle and count it, the logistics of moving it from the business to the bank. Businesses that accept cash or rely on cash are paying higher insurance premiums. In addition to higher handling and logistics costs, there’s the simple matter that more people want to pay now with debit or credit cards.
2. Checks Aren’t the Answer. As more banks gain the capacity to scan customer checks and send electronic copies along as payments, the paperwork coming in and out of your business will begin to dwindle. This year, financial experts say, about 30 billion checks are in circulation. Ten years from now, experts expect that number to drop to 20 billion.
3.  Reconciliation (and not Tommy and Pam). Sure, you need to collect as much money as you can from customers. But you wouldn’t believe how difficult it can be in some cases to keep track of who paid what and when they paid it. If you can’t keep up with this, it makes it especially difficult to track down the real problems. You can begin planning now for ways to tighten up your remittance crediting functions.
4. One word, Benjamin — e-invoicing. The ultimate elimination of paper when it comes to billing customers. It started slowly, but momentum is starting to build. It’s a situation where success breeds success. More companies e-invoice customers; more customer become accustomed to it. Creditors and customers then both realize how much money and time can be saved by taking the invoice function on line. It might take a little while to fully catch on, but e-invoicing is here to stay.

If you had a crystal ball and asked it to show you the future of procurement, there’s a good chance you’d be looking at supplier networks.

What’s that, you might ask. It describes an online system linking companies — like you — directly to your suppliers. You’ll bypass the traditional, manual means of doing business with paper purchase orders and paper invoices. As a result, there are fewer invoice discrepancies and lower processing costs, to name just two of the benefits.

Is there a driving force behind switching over? Yes. Streamlining supplier connections will save you plenty of bucks. With that in mind, it’s probably just a matter of time before the savings will cover the costs of switching over your system, at least for some businesses.

Two examples:

• The cost of processing a single payment through a network is $6.28; the old-fashioned way, $8.11.
• The average cycle time in days from receipt of an invoice until payment is scheduled is 15.5 days; doing it the old-fashioned way, 17.9 days.

The success and efficiency of supplier networks has already begun to spill over into Accounts Payable. Handling electronic payments takes far less time, leaving A/P staffers free to tackle pressing problems. 

Top performing companies, according to an AberdeenGroup report on supplier networks, utilized electronic invoicing (33%) and electronic payments (46%) more than lower-performing competitors. 

One example cited in the report: Five years ago, a North American company committed to implementing a supplier enablement program. Before taking this course, though, average processing costs for one order was around $20. Once the supplier enablement network was up and running, these costs were slashed 75%. In addition to lower processing costs, the company is reporting less invoice discrepancy.

It can be done. And it’s not smoke and mirrors.

The secret: Greatly reduce the amount of paperwork involved in the Accounts Payable process. Paper opens the door to a host of errors, according to a recent AberdeenGroup report. When staffers have to punch in data by hand and manually match invoice information, you can expect high error rates and increased costs.

The more invoices you receive (and process) electronically, the fewer your opportunities for errors. This process of electronic payment capability is commonly known as e-payables when referring to Accounts Payable processes.

Employing e-payables can increase the efficiency of:

• invoice receipt and handling
• reconciliation and approvals
• disbursement scheduling
• settlement, including confirmation and reporting, and
• internal and external service support

 Bottom line: Companies that streamlined the A/P process by doing away with most paper in favor of automation showed they could reduce the costs of processing invoices from receipt until the bill’s paid. At the same time, those companies reduced the amount of time it took for the same invoice-to-payment function.