The Top Five Obstacles That Impact the Cash Conversion Process

The cash conversion process is a critical business operation for third-party logistics providers (3PLs) and freight brokers. However, this process is often fraught with obstacles that can negatively impact cash flow and ultimately be an obstacle to maximizing profitability. In this blog post, we will examine the “Top Five Obstacles That Impact the Cash Conversion Process” and how automation can help address these challenges.  

1. Invoice Processing 

One of the most significant obstacles for third-party logistics providers and freight brokers is found in the manual processing of invoices. Many organizations manage a large volume of invoices, which only adds to the complexity of the manual process. Based on our own experience and as we have heard from our customers, this manual approach is time-consuming and increases the likelihood of errors. Ardent Partners released a report that showed that manual invoice processing can take up to 25 days on average. This delay only puts stress on cash flow which can limit the strategic investments that can be made. 

To address this challenge, there are automation technologies that can be utilized such as optical character recognition (OCR), document classification, and highly configurable business rules leveraging machine learning (ML) and artificial intelligence (AI). These technologies enable the streamlining of the invoice processing workflow and reduce the time to invoicing and the errors that often occur. ML-based OCR can help digitize paper invoices and backup, while the granularity delivered via highly configurable business rules can automate the entire invoice processing workflow from data entry to payment processing which enables greater overall efficiency for your business. 

2. Payment Delays 

Another challenge that we at Navix often see for our 3PLs and freight broker customers is the delay of payments. Much like invoicing errors and a prolonged invoicing process which we discussed above, payment delays have a negative impact on cash flow and profitability. In fact, a survey by Tungsten Network showed that late payments can cost businesses up to 3% of their annual turnover. Put another way, that is $1.5M annually for a $50M business.  

The use of automation solutions enables organizations to expedite the payment of invoices, reduce the stress on their cash flow and provide real-time visibility into payment status. This insight is invaluable and will create more efficiencies in the receipt of payments and help eliminate the business disruptions that occur due to payment delays. 

From a 3PL perspective, non- or delayed payment on a quick pay (QP) doesn’t incur a direct financial penalty, but it would definitely increase the number of vendor inquiries/demands for payment and there could be a legal risk.  

Most 3PLs want to do right by the vendors and could issue same-day pay for the full amount, losing the potential gains of offering quick pay. Failure to honor QPs could reduce negative comments against their broker MC, a reduced vendor pool, etc. These are mostly soft costs that could equate to hard dollar penalties.   

3. Disputed Invoices 

Disputed invoices can also be a significant obstacle for 3PLs and shipping brokers. American Shipper estimates that 80 percent of carrier invoices contain some kind of discrepancy.  

While disputes can arise due to a variety of reasons, such as incorrect billing or discrepancies in the services provided, it is estimated that 15-20 percent of these errors are overcharges by the carriers. Not only will disputed invoices lead to delays in invoicing and payment, but they will also most certainly impact the customer experience and put undo strain on the relationship between businesses and their clients. 

Both 3PLs and freight brokers can leverage machine learning to identify potential disputes before they occur. ML algorithms can analyze past billing data and identify patterns that can help predict potential disputes. This can help businesses proactively address disputes, reduce the risk of payment delays, and create a better overall experience for their customers which leads to customer loyalty and maximizing customer lifetime value (CLV).   

4. Inaccurate Data Entry 

There are numerous issues that occur when organizations have inaccurate data. Much of this is due to the manual data entry processes that many organizations still deploy.  Inaccurate data entry will almost certainly impact the cash conversion process. Not only will inaccurate data entry be more ineffective and inefficient, but it has also been known to result in incorrect billing, delayed payments, and disputes. All of these are negative business outcomes that limit growth potential and can have customers looking elsewhere for their shipping and freight logistics needs.  

One of the best ways to address this challenge is the use of automation technologies such as Intelligent Document Processing (IDP) or Optical Character Recognition (OCR) which enable the automation of the data entry processes.  

What is the difference between IDP and OCR? OCR and IDP are two different methods of reading text. OCR is software that can “read” text and convert it into digital form. IDP is a process that uses artificial intelligence to read the text and extract the information it contains. IDP is more accurate than OCR, but it can also be more time-consuming. However, getting things done right is far more important than getting them done right now.  

Additionally, by implementing this kind of automation, organizations can reallocate their personnel to other crucial areas of the business and maximize the value they are getting from their human capital.  

5. Manual Reconciliation 

When there are invoice errors that occur, a large number of brokers and 3PLs are still resorting to manually reconciling the issues. Similar to manual data entry, reconciling invoices and payments manually is time-consuming and prone to errors. As we heard from one customer, this process became so arduous that they determine that any error of $50 or less was not to be reconciled. Multiply that by hundreds of invoices per year and that is working capital that is not available to help grow the business.  

Reconciliation is again where machine learning can play a significant role. Machine learning has the ability to analyze billing and payment data and automatically reconcile invoices and payments, reducing the risk of errors and delays. This process ensures that human error does not come into play and enables the business to receive every dollar.  

There is no disputing that improving the time in the cash conversion process is critical for the success of 3PLs and freight brokers. However, manual processes, disparate systems, and outdated technology do nothing to improve this process. The use of automation and machine learning is a must for any organization that wants to maximize its profits and grow its business.