Cash Is King. It’s an immutable law of business. Like Sir Isaac Newton’s Law of Gravity for physics – you can try to fight it, but ultimately you will lose. Just ask Bernie Madoff, Lehman Brothers, and the PGA Tour (too soon?)
Cash or more explicitly Free Cash Flow is also the fundamental driver of business value. Here’s how Jeff Bezos describes it in his 2004 Letter to Shareholders:
“Our ultimate financial measure, and the one we most want to drive over the long-term, is free cash flow per share. Why not focus first and foremost, as many do, on earnings, earnings per share or earnings growth? The simple answer is that earnings don’t directly translate into cash flows, and shares are worth only the present value of their future cash flows, not the present value of their future earnings. Future earnings are a component—but not the only important component—of future cash flow per share. Working capital and capital expenditures are also important, as is future share dilution.”
Cash is the fuel that feeds the fire for building a bigger more valuable company, but mismanagement can quickly lead to burning the house down. As such, every business owner must have a fastidious approach to cash management – how you generate it, how you spend it, how you pay taxes with it, etc.
Furthermore, whether you use cash or accrual based accounting, the timing of those cash flows matters a lot. Sure, getting the sale is important, but even more important is getting the actual cash from your customer. In some businesses, you have to deliver your service before collecting full payment from your customer. You can send an invoice but it may take your customer weeks to pay you. If you have commission based sales people, then at the end of the quarter you might have a lot of cash being paid out. While you may have leverage to receive more favorable payment terms from customers, another point to consider is leveraging software to facilitate a faster, more seamless payment process, particularly one that encourages digital payments.
Show Me The Money!
If photos, movies, and music can be reduced to 0s and 1s, it’s only logical for money to follow suit. Software companies large and small identified the high costs and horrible experiences from legacy payment providers as targets ripe for disruption. The trends in digital payments have followed the broader changes in technology over the last 50 years, and they have only accelerated in response to the pandemic.
As consumers, most people are familiar with Amazon’s one-click check-out, Apple’s in-app payments, swiping their credit card through a Square dongle, or reimbursing their friend via Paypal or Venmo. Over the last 10+ years, there has been an incredible amount of innovation in consumer payments. Arguably Apple’s most significant product advancements in recent years have been the Apple Card, Apple Pay, and Apple Pay Later.
Digital commerce companies have made tremendous strides to reduce the friction of making purchases which has the byproduct of enhancing the consumer experience as well. Do you really want to type in your credit card information each time you use the Starbucks app to buy your daily cup of joe? Of course not! Instead, you want the immediate gratification that comes from knowing your mocha frappuccino will be ready in exactly 8 minutes providing just enough time to get the kids to school. The experience has become so seamless, so ubiquitous, and so reliable that it feels like magic. So why in the world are you sitting at your desk sipping your frappuccino while sifting through physical checks that you get in the mail from customers?
Help Me, Help You
Incredibly, physical checks still accounted for 42% of business transactions in 2019 🤯, but the pandemic has had a profound impact on the move to digital payments. Mastercard conducted a study showing that 50% of small businesses surveyed added a new digital service to collect funds faster and 25% moved to digital invoicing as a result of the pandemic. While digital payments may have a cost associated with them that traditional methods do not, there are significant indirect costs that your business may be incurring from those checks including manual reconciliation and payment delays. A report from Deloitte estimates that digital payments and cards were at least 3x more cost effective on average than traditional purchase order processing due to reduced manual intervention and less reconciliation effort.
Business-to-business (B2B) payments can be complex since they are usually larger in amount, vary in frequency, require payment approvals, and have different timelines for remittance. Just the other day we received an invoice from a vendor that included payment options for ACH, wire transfer, credit card, cryptocurrency 🤷🏻♂️, and even those dastardly checks! The diversity of selection is a great benefit to customers, but it doesn’t come without headaches for the business to manage as there are significant differences in terms of ease of use, speed of settlement, and cost. It’s why large corporations have whole teams of people in their Accounts Payable and Accounts Receivable departments. Yet, there are now software solutions that provide convenience for your customers as well as yourself.
You Complete Me
For our purposes here we will focus mostly on B2B payments rather than consumer-facing businesses, but rest assured if you are a retailer or restaurant owner there are fantastic point-of-sale solutions for you from companies like Square, Clover, and Toast. For ecommerce, Shopify has payments built in through its partnership with Stripe (which we’ll come back to).
As fully paid subscribers and loyal readers of our humble newsletter, you already know that digital capabilities are no longer captive to technology companies. The tool sets have advanced such that all companies can take advantage and digital payments are no exception. Even better, Quickbooks has digital invoicing and payments built into its product suite. Send custom invoices to customers via email that includes the ability to pay directly from the invoice with credit cards, ACH, or eCheck. Quickbook’s processing fees are very competitive not to mention the obvious benefit of having payments integrated directly into your accounting software creating a seamless workflow where you can initiate invoices, track receivables status, and automate your bookkeeping. Doesn’t get much easier than that! Not a Quickbooks user? No problem. Bill.com and Melio are also great options for sending invoices, tracking status, and receiving payments all in one place.
The out-of-the-box solutions for digital invoicing and payments are an easy way to get started. To get more advanced, you might consider how to build payments directly into your product or service or create your own payment portal for customers. Historically, it was an extremely cumbersome process that could take weeks to set up a payment gateway, be capable of storing credit cards, and ensure PCI compliance. Stripe solved this problem so that with just a few lines of code in your web or mobile application you could be accepting payments almost immediately. While Stripe has powered payments for companies like Lyft and Slack, it's not just for Tech companies anymore. For example, Ford recently announced a partnership with Stripe where the carmaker will use Stripe’s technology to upgrade their ecommerce and payments experience. It seems likely we’ll soon see digital payments as part of the car’s infotainment system.
We can take this even one step further. Let’s say you operate a marketplace business – it could be a logistics business or a home health care company. You have customers and vendors or patients and caregivers. Your business is to facilitate the service but also to collect and distribute payments. A service like Stripe Connect was purpose-built to be the single system to process payments for both sides of the transaction which abstracts away the complexity from processing payments, ensuring compliance, and preventing fraud.
More often than not, when you recognize a pain point in your business, there is a software solution to ease that pain. Digital payments are a fantastic means to not only enhance your customer experience, but also get paid faster. Our only limitation may be our creativity for generating use cases. Who’s coming with us!?!?
