Optimizing your company’s payables in the COVID-19 era

Squeezed for cash, many CFOs are turning to “virtual” credit cards to gain tighter financial control over spending and turn payables into revenues

These days, the corporate check isn’t in the mail. It’s stuck, uncut, unsigned or unsent in millions of locked-down offices and accounts payable departments around the globe.

The COVID-19 pandemic has sidelined millions of workers, many of whom are responsible for helping move $120 trillion of daily transactions in B2B payments. Whether they’re CFOs or accounts payable managers, they’re the economic arteries that keep money pumping through the global economy. They’re also responsible for the cash flow, security, financial controls and in many cases the business continuity of their individual enterprises. Understandably, many of them and their organizations had no business continuity plan in place to deal with a pandemic.

As a result, many people seem to be struggling with what used to be routine transactions. For finance leaders, that not only means getting money out the door to pay suppliers, but also figuring out how to make payroll when their revenues are contracting as a result of the lockdown keeping customers away.

Because of this, it’s more important than ever that companies evolve to manage payables as a key lever in their finance strategy. “Optimizing your payables means finding the best mix of vendor payments,” says Nick Drapeau, Global Treasury and Payments Advisor at SVB.

Increasingly, that means moving away from the paper-based checks. In June 2019, Mercator Advisory Group found that paper checks accounted for 47% of all B2B payments in the U.S. in 2018. (The cost of processing and moving all that paper, according to Deluxe Corporation, the financial services company that makes checks: $9 billion per year.)

An emerging alternative is Virtual Card Numbers (VCNs), which, if used wisely, create process efficiencies while improving transparency, security and control. VCNs can also increase a company’s working capital as cash payment shifts to a credit card schedule. These are welcome benefits in uncertain times.

How VCNs work

A virtual card is tied to a customer’s corporate card account. A departmental manager requests a VCN from the bank, which then issues a unique 16-digit account number. The manager or an employee typically sends the VCN over secure email to the vendor (though it can also be issued via online portal). The vendor in turn processes it like a normal credit card transaction.

As an added benefit, the VCN can be issued with several layers of control. For instance, it can be authorized for multiple transactions, not just one. The dollar amount can be exact, like if an employee wants to buy a one-time subscription to an online tool or attend a conference. It can also contain a minimum amount or a dollar range, a validity period, and even be bound by time of day and location.

A VCN can also be set up with what’s known as a declining balance. For example, a marketing department could create a VCN with an available balance of $500,000 and a validity period of one year. The department can then draw from that balance to pay for their ad campaigns until the money on the card runs out.

The enhanced data inputs of VCNs also include the ability to embed a vendor number, invoice number and purchase order number. These controls, as well as the details of the transaction, enhance AP managers’ efforts to reconcile their ledgers at the end of each month because each payment is digitally recorded and collected in one place.

“Because it’s a one-to-one, not a one-to-many payment system, reconciliation becomes a lot simpler,” says Cheryl Platt, Commercial Card Strategic Accounts Manager at SVB.

That’s a big difference from a lot of other B2B digital transactions, where companies are given a lump sum record of what they spent, but no detail about who spent it, on what and why. “There’s not a lot of tracking” in those other payment systems, says Platt. “But with VCNs, you can go back, scroll down and see exactly what a payment was for.”

Easy approvals

VCNs are flexible enough to fit the modern workplace. One of SVB’s clients allows the use of virtual cards through Slack, the well-known workplace chat application. So, for example, when you’re in Slack, “you can send a message to your manager saying, ‘I need to buy a subscription to HubSpot. It costs $34,’” says Platt. “Your manager gets that message and can say, ‘Yes, I approve it’ or ‘No.’”

If approved, your return message is a VCN that you use to place your order. “The good news there is, you’re asking permission, rather than forgiveness at the end of the month when your AP manager receives this expense report and goes, ‘What on earth were you buying?’” says Platt.

In other words, it gives managers a proactive ability to approve an expense before it occurs, rather than being reactive after the fact. Having this financial control and transparency is especially important when companies are tightening their belts and so many employees are remote. “The AP person seeing an expense report at the end of the month can't do anything about money that’s already out the door,” says Platt. “This solves that issue.”

Maximizing your working capital

Plenty of companies use a computer-based automated clearing house (ACH) to pay suppliers directly from their banks. The trouble is, once you hit send, that money is gone from your account within a day or two. And when you’re paying a big supplier bill, say $100,000 monthly for advertising with Facebook or cloud-computing with Amazon Web Services, that can ding your working capital and leave you less room to maneuver, especially during hard economic times.

Using a credit line has always been a smart way to increase cash flow. It means delaying the actual payment, not having to pay the charge for up to 55 days. That so-called “float” is more crucial today as companies face a cash crunch from the economic impact of the COVID-19 crisis.

“Any time you can take a payment that’s due and pay it a month or even two months later, it’s always going to be a good thing,” says Todd Smith, Vice President, Corporate Controller at San Francisco–based company Sun Basket, a 6-year-old startup that provides subscribers with organic and sustainable ingredients to cook their own meals. Having the flexibility to put payments on VCNs, Smith says, “could make the difference between you having a serious liquidity problem or not. You want to have that in place before you need it.”

Learn how SVB's Virtual Cards can benefit your business.  

Brian Kass, Commercial Card Strategic Accounts Manager at SVB, has seen a widespread move to preserve cash among CFOs and accounts payable. “People don’t know what’s going to happen month to month,” says Kass. “They don’t know what’s going to happen with unemployment benefits. Will their sales go down? They don’t know and they want as much cash on hand as possible.”

Turning payables into revenue

No matter the company, the payables department will always be considered a cost center. But it can help support itself and even do away with the need to hire more staff. The efficiencies created by VCN usage—notably the ability to easily track and reconcile expenses at the end of each month—mean fewer work hours are spent handling paper checks and tracking down receipts.

In addition,  SVB lets companies earn rebates, or share in the revenue SVB makes from interchange fees suppliers pay to use the technology platform. Depending on how much a company spends, it can earn as much as 1.5 percent of its overall spend.

“We’ve seen clients earn hundreds of thousands of dollars via revenue share,” says Drapeau. “That’s pretty significant. It’s far and away the biggest driver to adopting these VCNs.”

Drapeau has seen clients reinvest that money into supporting the payables payroll, for employee incentive programs or to give something back during this current crisis. “In part we’re looking to improve the lives of clients and their businesses,” says Drapeau. “That can be anything from giving their workers $50 gift cards to Amazon or even turning Treasury into a revenue center that supports strategic initiatives.”

For more information on VCNs and how to optimize your corporate card program, contact your SVB Global Treasury Product Advisor.