By guest contributor: Henning Holter, Tungsten Network

You’re probably familiar with the butterfly effect. A butterfly flaps its wings, resulting in a chain of minor events that eventually leads to something major, like a hurricane. Everything is connected, and business is no different. Your business’ behaviour impacts both your customers and suppliers, just as your success is mutually dependent on theirs. That’s why supply chain management has long been recognised as a critical business function.

The financial supply chain is just as important. Scott Pezza, MD of Beck Anderson Research and formerly of Aberdeen Group, defines it as, “The transactions that occur between trading partners that facilitate the purchase of, and payment for, goods and services, such as sending purchase orders and invoices, and making payment."

Late payment and cash flow

The financial supply chain and its impact on the economy has been in the news recently. The Times and the FT were among the publications to report on the £40bn owed to UK SMEs in late payments. With the average company employing fewer than 250 people and awaiting £38,000 in unpaid bills, the knock-on effect causes a quarter of companies to pay their own suppliers late. And on it goes: a vicious cycle of inefficiency and potential insolvency.

And late payment isn’t just a European problem. In the US, President Obama met with representatives from large companies such as Apple, Coca-Cola and Johnson & Johnson to discuss their pledge to pay smaller suppliers within 15 days. The White House says that this initiative, "Demonstrates a recognition that a healthy supply chain is good for business." The programme mirrors the federal government’s own promise to pay contractors quickly if those companies commit to swiftly paying their suppliers.

Cash flow is fundamental to an SME’s survival, and in the wake of the global financial crisis traditional lenders, like the big banks, have been reluctant to provide financing to SMEs. Additionally, traditional supply chain finance (SCF) schemes are difficult to join, expensive and struggle to get suppliers on board.

The role of e-Invoicing in the financial supply chain

The current situation is untenable and something needs to be done. Worthy government initiatives (both UK and EU) around late payment need to have a greater effect, especially as the value of unpaid invoices to UK SMEs has grown by almost £10 billion over the past 12 months. Another solution is needed. And that’s where electronic invoicing comes in.

e-Invoicing streamlines the purchase-to-pay process – a central link within the financial supply chain – eliminating paper, increasing efficiency, cutting costs and reducing invoice exceptions, processing time and manpower. So what value does e-Invoicing unlock, and how does it strengthen the financial supply chain?

• Prompt payment and greater visibility: as customers improve their invoice-management processes, suppliers gain more predictable and timely payment. Suppliers can better manage their cash flow as they can easily track the status of their invoices to see when they will get paid
• A source of alternative finance: e-Invoicing networks are uniquely equipped to offer financing to SMEs, as they already have suppliers using their services. In contrast, banks and traditional SCF providers struggle to attract them through cumbersome registration processes, complicated contracts and expensive services
• Greater cost savings: improved processes become less expensive and easier to manage for both buyers and suppliers. Buyers can reallocate resources to bring added value to their Accounts Payable departments. e-Invoicing also  enables them to capture early payment discounts, a useful tool for Treasury teams focused on strengthening working capital. Suppliers also gain efficiencies by no longer wasting time and money chasing late payments, which can cost up to £10,000 per month
• A stronger supply chain: by giving suppliers the reassurance that they will get paid on time and the added flexibility of taking early payment when required, e-Invoicing improves relations between customers and their suppliers, and brings strength and fluidity to the financial supply chain

The future

e-Invoicing brings additional intelligence to the financial supply chain and is shining a light on outdated practices. Traditional financing, for example, isn’t working, but e-Invoicing is and it’s keeping the wheels of the financial supply chain in motion. The private and public sector are reaping the benefits of automated invoicing processes, and suppliers are getting paid on time or, even better, paid early.

By making the effects of late payment a thing of the past, money can flow swiftly through the supply chain, which gives suppliers healthier cash flows and drastically reduces their risk of failure. This in turn gives buyers peace of mind with a secure and stable vendor base. The butterfly effect here is clear: everything is connected, and everybody benefits when businesses stay in business.