When it comes to definitions, economics can represent both art and science. Take the term “recession” for example. If you want to go by the book, some economists say two consecutive quarters of declining GDP define a recession. If you want to loosen that up a bit, the National Bureau of Economic Research says a recession is “a significant decline in economic activity that is spread across the economy and that lasts more than a few months.” And then there’s the more casual definition attributed to former US president Harry Truman that says “a recession is when your neighbor loses his job. A depression is when you lose yours.”
However, some economic conditions have no easy terminology attached. For example, we know that the rate at which prices for goods and services rise is called inflation. But what if inflation occurs while revenue is dropping? There’s no economic label that fits. But there are plenty of other words that should come to mind, the most basic of which is “trouble.” And while it might not be on the short list of solutions to this “conundrum,” AP automation is one of the ways that price increases and revenue decreases can be managed.
Because as the economy continues to be plagued by this uncertainty, cash flow management becomes more important by the day. Because it’s only one side of the “pay and get paid” equation, AP automation doesn’t get the credit it deserves as a complement to a cash flow management solution, but it should. As costs rise, companies may experience higher AP obligations, requiring a shift in cash flow management and perhaps different payment terms with suppliers. As my colleague Jeff Feuerstein said recently, “Cash flow management is critical in these times and that means companies need visibility into all facets of the payment lifecycle, including when they're getting paid. More than ever AP automation can manage that cash flow. There are several advantages here. With automation companies can analyze and act on data on invoices coming from suppliers and then maximize cash by taking discounts using tools like virtual cards and premium ACH, which generates rebates on spend.”
I couldn’t agree more. A good way to prove this theory is by looking at one of the industries currently struggling with price increases and revenue decreases, and that’s commercial real estate (CRE). The pandemic was devastating for CRE lease revenue as well as overall property valuations as workers went home to socially distance and have not returned at the expected level. According to investment firm Franklin Templeton, office vacancy rates in the US reached 17.1% in July with heavily impacted cities like San Francisco, Austin and Houston topping 20%. And for net new CRE construction, materials have been sent higher due to pandemic-related supply chain interruptions. Specific figures on that increase depends on the material in question and the market it’s being sold in, but investment services firm CBRE has called the spikes in material and labor over the past two years “unprecedented.”
The good news, according to CBRE, is that 2024 is expected to bring better supply chain efficiency, better lease margins and higher property valuations. It’s also good news that CRE can benefit significantly from AP automation’s efficiency. It starts with paper. By cutting back on paper checks, CRE companies can start to lower the cost of their AP departments in a business that has been paper-centric up until now.
"Today the majority of CRE B2B payments are still made via check," says Dhiren Patel, head of CRE Deposit & Payment Solutions for U.S. Bank. “There are many reasons for that: habit, the perception of greater security, and the belief that vendors and suppliers won’t accept virtual cards or ACH. The biggest driver is complexity. Most CRE clients have several entities – one for each asset – and many bank accounts across many banks. We can help with that challenge. Our team enables businesses to safely transition to better money-movement solutions, like U.S. Bank AP Optimizer® which allows companies to send all payment types, with seamless integration to their accounting systems.”
Another bit of good news comes from the attitude CRE companies have toward technology. According to a research project conducted by Deloitte earlier this year, most respondents say they plan to use outsourcing to drive efficiency. Their primary goals are gaining technological capabilities to streamline processes and adding agility and resilience to their operations. It recommends that CRE firms “address years of amassed technical debt by ramping up technology capabilities. Most respondents (61%) admit their firms’ core technology infrastructures still rely on legacy systems, but nearly half are making efforts to modernize.”
As these modernization efforts continue to play out, AP automation stands ready to add that agility and resilience that the Deloitte report mentions. We’ve identified five of the features CRE companies should look at as they evaluate AP automation solutions:
Electronic remittance: AP automation should make it easy for suppliers to navigate e-payments. Electronic remittance advice should work seamlessly with automated cash applications as vendors choose aggregated remittance delivery of files that detail each transaction.
Efficient network onboarding and updates: The solution should ensure that investment and divestment updates are handled without time consuming implementations each time. The solutions should also include multiple methods to push vendors onto the network, making it easier for the AP team to navigate new additions.
Optimization: A process called Intelligent Payment Routing should ensure that vendors are getting paid in their chosen format without having to alter the master vendor record. The network should also pay vendors immediately. That means same day card payments, overnight ACH payments and check payments cut the day the payment file is sent.
Integration: A new network that can be implemented directly through automatic integration with Yardi, MRI, JDE, Sage and others.
Fraud mitigation: The construction industry over indexes on payment fraud attempts. The combination of visibility in projects, transient workers and short-term payment needs are just some of the unique issues the industry faces. Speed, efficiency and security should live on the same network with no compromises.
The Bottom Line: Rising costs and declining revenue, regardless of how you define it, is never an easy situation. But when every payment needs to be transparent and efficient, AP automation can be a huge positive. And as U.S. Bank’s Patel will attest, the benefits can go beyond dollars and cents. “The CRE business is all about a collaborative experience in a physical setting," Patel says. "We need to ensure that experience is positive across all interactions, including making payments. Ease of doing business is critically important when it comes to vendor satisfaction as well as our own AP departments."