New ecosystem emerging in the working capital world through government-led reforms

Each organisation's working capital challenges vary: from inefficient legacy systems to the cost of cross-border payments to personnel training on new tax compliance rules. However, three critical challenges that still exist are delayed payments, lack of visibility and inaccurate cashflow forecasts and high cost of operations. 

To address these challenges, a new ecosystem is emerging in the working capital world through government-led reforms, fintech, SaaS offerings and supply chain financing, said Abhilash Edakadampil, CTO, Global PayEX.

J.P. Morgan’s recently published report analysing S&P 1500 companies reveals the multiple challenges to working capital efficiency that enterprises are facing. Simultaneous challenges in the form of a pandemic, recurring lockdowns, geopolitical disruptions, and sudden monetary tightening in light of record inflation have posed severe roadblocks to business continuity. 

The key technologies that will help mitigate these challenges to enable financial transformation are E-invoicing, SaaS technologies and Machine Learning.

E-invoicing is now becoming standard, and GST and a nationwide e-Invoice format are two excellent forward-looking initiatives by the GOI. Abhilash highlighted how with fintech players like Gloabal PayEX, Sellers can now create an invoice in their ERP, and everything else from the presentation and dispute handling to payment is automated.

While SaaS as a delivery mechanism has existed for a long time, Corporate Finance is now trusting it to handle their A/R and A/P needs. They no longer insist on "on-prem" deployments and are now aware of encryption in transit, at-rest, tokenization, etc. This means they can now unlock the benefits of SaaS, including lower TCO and higher speed to market. 

While still in their infancy, ML models specializing in A/R and A/P functions, including invoice creation, reconciliation, and verification of deductions, are being launched. In the next three years, we will see an increase in the adoption of ML models in working capital, leading to lower write-offs, faster deduction handling, and ERP-to-ERP dispute resolution based on previous training, he said.

The traditional challenge in the receivables part of working capital is delayed payments. Buyers agree to a credit period (usually between 30 to 60 days) depending on the nature of the business. Depending on the region and industry, approximately 25% of Buyers extend the credit period. Sellers incentivize them by offering early pay discounts. 

Banks, Neo-banks, and NBFCs are willing to provide channel financing. Buyers today have multiple options for capital, and we can stitch together a solution that benefits both. However, there are still delayed payments. The root cause is that the end-to-end process is still not seamless. This system has multiple breaks: knowledge, training, process, people, and technology-related that dissuade buyers from utilizing these options, said Abhilash.

The JP Morgan report highlighted that after reaching a peak of 116.3 points in 2020, the Working Capital Index has come down to 105.1 points in 2021. This 11.2 points drop reveals that supported by increasing sales, innovating with new distribution channels, and better cash conversion cycles, enterprises have improved their working capital availability.

Global PayEX is focused on resolving the complexities in the accounts receivable (AR) and the accounts payable (AP) cycles of enterprises. Our products transform using multiple technologies and process improvements. ML is essential for us; let me give you an example. As you know, FMCG is one of the larger industry verticals; approximately 13% of FMCG collections are through modern trade and e-tail. This number of 4% about five years ago. We expect this number to reach 25% in the next three years, Abhilash added.

(Disclaimer: The views of the writer do not represent the views of WION or ZMCL. Nor does WION or ZMCL endorse the views of the writer.)