How GovCons can use automation to manage their cash flow more effectively

As the lifeblood of an organization, developing a healthy cash flow is a mission-critical endeavor for all businesses. This process must be managed carefully to meet the financial obligations of today and to set your business up to thrive in the future.

But what does “healthy cash flow” actually mean? Traditionally, this meant getting paid in a timely manner and paying out what you owe without incurring late fees. It also meant hiring full-time employees or carving out a significant amount of time from employees who wear multiple hats.

This strategy is inherently risky, and therefore is a strategy modern business cannot follow. According to the GAUGE Report, a survey of experts in the GovCon industry, the benchmark for healthy cash flow is an accounts receivable (AR) program with a DSO lower than 30 and an AP process that takes a business less than 100 hours annually to maintain. These figures are taken from businesses that have a highly automated AR/AP process that results in a greater cash in-flow, a controlled cash outflow, and reduced operational spending that produces greater overhead ROI. All of which ensures liquidity to meet financial obligations today and capture new opportunities as they arise. In this blog, we will explore the two main components of cash flow, accounts receivable and accounts payable, and how GovCons can harness automation to achieve healthy cash flow.

Money in: An overview of accounts receivable

The first component of cash flow we will examine is accounts receivable (AR), or how businesses bring money in.

For years, this process has been run through the mail, ad hoc communication, and waiting on checks to arrive. According to PYMNTS, this type of AR procedure results in an average Days Sales Outstanding (DSO) of 44 days. This means businesses on average can expect to collect and (depending on when a check is cashed) cash in on the money that is owed almost two months after they issued an invoice.

In today's business landscape, that could mean a missed opportunity or – as we will explore in the next section – a strained vendor relationship. How does that figure translate to the GovCon industry? According to the GAUGE Report, 34% of GovCons have a DSO of 31 – 45 days while 24% have a DSO greater than 46 days. Compared to an automated system, which that same PYMNTS report found to be an average 29 days, that leaves GovCons with room for improvement.

The evidence is clear: using manual processes for invoicing can cost your business time and money. Now compare this to how long it takes businesses who use automation. According to the PYMNTS report, the average DSO for businesses that use automated processes is 29 days.

For GovCons uploading invoices to Wide Area Work Flow (WAWF), customers also want to receive invoices directly for visibility. Automated invoicing and reminders ensure your clients are aware of open invoices in a clear but respectful manner. It also helps persuade them to check WAWF to pay invoices.

For commercial work, receiving payment via check is a risky and time-consuming process. Checks are routinely lost and open up opportunities for fraud. With automation, you can facilitate your clients’ payments for commercial work invoices in a timely manner.

PYMNTS found that 96% of chief financial officers (CFO) say automated AR processes are highly important to maintaining healthy balance sheets. 75% of executives say that AR automation increases their cash flow.

Offering clients the ability to pay invoices electronically gets you paid faster and gives your customers more options to pay. You allow them to choose the method that works best for them.

With automated tracking, you can monitor open invoices to prevent payments from progressing too far – minimizing risks associated with your company having to make unnecessary write-offs. Automated tracking can also provide up-to-date insights on DSO and AR turnover, pushing your business to explore and introduce more effective AR methods.

Measuring what matters: Lower DSO, less time spent managing AR

Money out: An overview of accounts payable

Accounts payable (AP) refers to money flowing out of your organization in the form of payments to vendors.

Outdated legacy processes lead to high operational costs and low return on operational investment. You also expose yourself to a higher risk of errors. All of these factors can add up to strain your vendor relationships.

According to research from PYMNTs, 93% of firms believe their existing AP processes are ineffective. The Institute of Finance and Management reports that manual AP processes cost businesses 300% more than automated processes through operational spend on the processing and fixing of errors as well as late payment fees.

Data from the yet-to-be released upcoming 2024 GAUGE Report from Unanet and CohnReznick sheds additional light on this. Firms with an annual revenue of under $25 million are twice as likely as larger firms to average 0-15 days for AP processing. Additionally, firms with a smaller number of employees are less likely to commit payment errors.

Modern (integrated and automated) AP processes allow your business to optimize the way it manages its spend while migrating employee focus and spend to tasks with a higher ROI. Automated AP uses technology like optical character recognition (OCR) and artificial intelligence (AI) to ingest and map invoice values to their appropriate accounting fields. This helps to eliminate errors and reduces time spent on processing.

Measuring what matters: how long does it take to process an invoice, how many late payments does your firm commit, how many payments does your firm miss, how many employees manage or oversee AP processes

Connect AR and AP processes with automation

Automated AR and AP processes result in a healthier cash flow. GAUGE Report research found that only 30% of GovCons say their AR and AP processes are more than 50% automated.

Full automation yields the greatest results. Automating only part of the process is a bottleneck that will slow your cash flow and introduce additional risk.

According to a PYMNTS survey, 83% of executives found that automating AR leads to more efficient, accurate, and streamlined processes. 85% of executives said the same about automating AP. The end result is a healthier and higher performing business.

Disparate processes and point solutions lead to a lack of visibility and partial automation. This is less than ideal from an efficiency perspective. As your business envisions its cash flow (money in and money out) as one system, you must also manage it in a connected and centralized manner.

When deciding to automate your AR and AP processes, look for a vendor that can offer you both AR and AP capabilities alongside project management and project accounting. Connecting your company’s financials with cash flow is key.

With the right automated AR and AP processes in place, your business can push itself to a new level of operational efficiency. You’ll find more liquidity, giving you added flexibility to grow and capture new business.