Photo by Lukas Blazek / Unsplash
The Time Value of Money and Accounts Receivable Software: How Faster Collections Improve Financial Performance
Time Value of Money (TVM) is one of the most basic economic principles in business finance, which states a sum of money available today is worth more than the same amount in the future. This is because today’s cash can be reinvested, accruing interest, or financing business operations, whereas there’s a potential for loss of value with delayed payments over time. The role of accounts receivable (AR) software in applying this principle is to step-up cash inflows and help mitigate the damage done by delinquency.
Principles of the Time Value of Money in Business Finance
Basically, it's the concept that money is time-sensitive. This is taught in a university finance class and a very big part of corporate finance, investment analysis, and banking decision making. It is based on the premise that a dollar has less value over time due to inflation, opportunity costs, and risk.
For businesses, unpaid invoices are money that isn’t working for growth. The longer a company has to wait to get paid, the less that money is worth in real terms. And this is why companies work so hard to reduce their Days Sales Outstanding (DSO)—the average number of days it takes to get paid.
Impact of Accounts Receivable Software on Cash Flow and Time Value of Money (TVM)
Accounts receivable software helps businesses shorten payment delays, optimize their working capital and increase financial efficiency. Here’s how:
By Automating Your Invoicing And Payment Reminders
Traditional invoice processing is tedious and prone to errors, resulting in payment delays.
With AR software the invoicing process is automated—real-time invoices are sent, and payment reminders are sent as that date approaches.
In fact, a study from PYMNTS.com found that businesses using automated AR systems saw 30% fewer late payments.
Immediate Access to Payment Tracking
Companies can get real-time visibility into overdue invoices and can therefore monitor overdue payment.
That visibility allows finance teams to more accurately predict cash flow and make better decisions.
Lowering DSO (Days Sales Outstanding)
DSO is a business performance metric which reflects the average number of days it takes to collect within the accounting period. With a high DSO, there’s less liquidity, and cash is locked.
For instance, a 2022 report by Atradius revealed that U.S. firms with a high DSO faced a 25% greater chance of cash flow deficits and, in turn, were unable to further invest for growth.
Provide digital payment alternatives
By linking digital payment methods through credit cards, ACH transfers and mobile payments, AR software helps to accelerate payment collection time.
For example: A recent research by American Express found that businesses that offered digital payment options experienced a 40% decrease in payment delays compared to companies that were still using checks.
Case Study: How a Company Used AR Software to Improve Cash Flow
An exemplary case of TVM AR automation at scale can be found with a medium-sized manufacturing company. The company had an average DSO of 55 days, before the new software, meaning that cash received from sales was trapped for almost two months. This triggered a liquidity crunch that made the company postpone payments to suppliers and miss investment opportunities.
Post-AR automation however:
· DSO fell to 30 days, releasing cash.
· It allowed the organization to reinvest $500,000 a year in production enhancements.
· $50K/Year savings from reduced interest payments on short-term borrowing (previously used to offset cash shortages)
Consequences of Not Applying TVM Towards Accounts Receivable
When companies don't make AR efficiency a priority, they suffer:
•Lost Investment Opportunities: If payments are received late by a business, it cannot reinvest cash in high-return projects leading to loss of return on cash.
• Increased Borrowing Costs: Companies with slow collections may have to use short-term loans or lines of credit occasionally to cover operating expenses, which increases interest costs.
• Greater Risk of Bad Debt: The longer you leave an invoice unpaid, the more likely it is that the payment won’t ever be collected.
Conclusion: AR Software Provides the Best Value for your Buck.
Time Value of Money (TVM) is a strong principle which suggests that no business can maintain a sound balance without timely collections. Rightly so, accounts receivable software is very much in alignment with this notion as it is all about reducing delays, increasing liquidity and allowing enterprises to maximize the dollars they spend today.
Accounts receivable (AR) software converts receivables to revenue faster by automating invoicing, tracking payments in real time, streamlining reconciliation and applying digital wallets as the flexible payment option, which all help reduce DSO. In a growingly competitive financial environment, businesses that harness AR automation will gain a competitive advantage — ensuring that their money is still working for them today, rather than losing value tomorrow.
