The role of a CFO has evolved over the years from managing financial operations to developing and driving corporate strategy while maintaining organizational resilience. However, one of the biggest challenges that remained unchanged along the way was navigating the pitfalls of corporate finance.
Certainly, having money to spend is not a luxury that many companies can afford. The way to obtain cash even to support a business involves cumbersome procedures and solid guarantees, thus limiting the ease of access to timely financing. For CFOs of small and medium-sized businesses, this translates into an acute problem that delays or stalls operations.
Challenges CFOs Face in Cash Management
Cash credit or overdrafts are a well-known financing option for businesses and in fact constitute 70% of the total bank credit extended by Indian banks. On top of that, there have been asset-based lending requiring strong collateral, which hurts most small and medium-sized businesses. These types of loans are not customer-friendly and are designed to keep asset-rich businesses in mind. It also forces small businesses to turn to unorganized sources for quick credit, which is obtained at high interest rates, ultimately jeopardizing their own profits.
Then there are other forms of financing, such as purchase order (PO) based financing, cash loan, and bill/invoice discounting, among others, which are lucrative options for small businesses. .
Invoice discounting provides businesses with an almost instant cash injection. However, enabling this mode of financing without technology also involves cumbersome processes surrounding document verification and reconciliation of accounts receivable, thereby delaying the disbursement of funds..
Another major issue faced by SMEs is the length of payment cycles which range between 60 and 120 days, despite the implementation of the MSME Act 2006, which requires all MSME payments to be unblocked within the 45 days. This further aggravates the cash flow problem. Because of these challenges with traditional financing methods, a large portion of small suppliers have an unmet need for credit.
The rise of tech-driven invoice discounting has been a boon for CFOs
Technology-driven bill reduction has just taken off in India in recent years. Digitization has made it possible to verify both the trust and the quality of a company.
With the introduction of GST and electronic invoicing, lending institutions and CFOs are assured of greater transparency and accountability, two major factors in corporate finance. Additionally, a highly digitized supply chain and significant improvements in automation and self-service capabilities as well as ERP integrations fueled technology-driven invoice reduction..
India’s digitization efforts have propelled an ecosystem conducive to the development of platforms that can calculate rebates dynamically. This is made possible thanks to a sliding scale, determined by the days paid in advance. Simply put, the technology makes it possible to offer variable discounts based on payable days. This is then reduced to the date of payment of the invoice rather than a fixed discount which does not take into account the number of reduced payable days.
Technology-driven invoice discounting gives suppliers easy visibility into their receivables and timely, unsecured funds at minimal cost. This allows them to continue their existing businesses and propel their growth. In addition, they also benefit from prepayment discounts with their own suppliers. Invoice discounting also helps SMBs process payrolls on time, expand their customer base by offering better payment terms, and meet seasonal spikes in demand.
Technology-driven processes make it easier for SMEs to obtain financing at different stages of the supply chain. It also offers full transparency to auditors, while connected systems and real-time dashboards would better equip CFOs to make business decisions more efficiently. Invoice Discounting is about to overhaul the way businesses meet their working capital needs.
About the Author: Archit Gupta, Founder and CEO – Clear
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