Optimizing AR to Mitigate Uncertainty for Middle-Market Businesses

• More than half of middle-market CFOs interviewed said that challenges in receiving payment contribute significantly to their uncertainty.
• Surveyed CFOs whose business customers have more than 30 net days to pay an invoice attributed 4.6%, or $19 million, in lost revenue to payment uncertainty.
• Fifty-five percent of middle-market firms would be willing to pay 3% of the invoice amount to accept payment using a solution that automates invoicing approval and payment to deliver certainty.

Accounts receivable (AR) management for middle-market businesses is a manual balancing act between efficiency and security. Efficiency prioritizes streamlining invoice processing and collection to accelerate cash flow. Security focuses on safeguarding against risks such as non-payment, fraud and data breaches. For smaller middle-market firms, those with revenues between $100 million and $250 million, this balancing act too often tilts toward payment process uncertainty. Sixty percent of these firms report significant challenges in managing payments. Among their larger peers in the $750 million to $1 billion revenue bracket, 2 in 5 firms face similar issues.

AR uncertainty can result in myriad challenges. At the less severe end are cash flow and revenue forecasting challenges. More severe issues are also possible, such as the increased risk of bad debts and strained customer or supplier relationships. Embracing new payment technologies could be vital to mitigating AR uncertainty, allowing firms to transform financial challenges into opportunities for growth and stability. However, larger firms more readily embrace payment technologies such as virtual cards. Seventy-nine percent receive payments this way, compared to 60% of smaller firms. For these smaller firms, in particular, this shift in AR operations could provide a competitive edge.

• What’s at Stake
• CFOs Willing to Invest in AR Automation Technologies
• Impact of Payment Delays on Operational Uncertainty
• CFOs Adapting Strategies for Efficient Invoice Collection
• AR Uncertainty Can Exact a Hefty Toll
• Conclusion
• Methodology

What’s at Stake

AR processes can gauge a firm’s operational health and reflect broader economic trends and challenges. For middle-market firms, uncertainty in AR can have substantial costs. Surveyed CFOs with business customers that have more than 30 net days to pay an invoice attributed 4.6% — some $19 million — of lost revenue to payment uncertainty. Adopting modern payment technologies such as virtual cards can lead middle-market firms to greater certainty.

Addressing AR Uncertainty in the Middle Market

Firms not using virtual cards also happen to experience an average revenue loss of 4.6% from payment uncertainties. Larger, more financially robust firms report a lower impact, however. These losses highlight the uneven distribution of uncertainty across the middle market, emphasizing the strategic importance of AR management innovation. Because uncertainty impacts smaller middle-market firms more, they will also see the most significant benefits of integrating advanced payment solutions into their financial operations — and need strategic innovations tailored to their unique challenges.

The payment terms offered to business customers deeply influence uncertainty. Firms allowing more than 30 days for invoice payments are 57% more likely to experience significant AR challenges. In an average month, 7.4% of middle-market firms’ business-to-business (B2B) payments arrive late. Smaller middle-market businesses, those with revenues ranging from $100 million to $400 million, are again more affected. These firms receive 8.3% of payments late and often having less agency over payment terms.

These are just some of the findings detailed in “The 2024 Certainty Project: Optimizing AR to Mitigate Uncertainty for Middle-Market Businesses,” the second edition of the PYMNTS Intelligence 2024 Certainty Project. This monthly project rotates through CFOs, heads of payment and heads of operation to monitor trends and sentiments regarding the operations of U.S. firms with revenues between $100 million and $1 billion. This edition, a collaboration with Previse, explores AR challenges, the role of virtual cards and the impact of billing terms on repayment trends. It draws on insights from a survey of 60 CFOs of middle-market companies. The survey was conducted from Feb. 12 to Feb. 21.

CFOs Willing to Invest in AR Automation Technologies

More than half of middle-market businesses would be willing to pay 3% of the invoice amount to accept payments using a solution that automates invoice approval and payment.

Middle-market firms actively seek solutions to streamline AR processes and are willing to invest in solutions for greater payments efficiency and certainty. The average middle-market firm deals with approximately 1,500 invoices monthly, illuminating the impact even a small percentage fee for payment solutions could have on operations. To illustrate, a CFO who accepts a 3% fee on a $1 million invoice to accept payment is out $30,000. A CFO with 1,500 invoices of $1 million each is out $45 million.

In this context, it is notable that 55% of these firms express some interest in paying a 3% fee to use a solution that automates invoice approval and payment. This willingness indicates that CFOs are ready to invest more than the current 2% market average in technology that mitigates AR uncertainties, especially virtual card nonusers. A smaller but significant portion of CFOs, 10%, are relatively more open to paying a 3% fee.

Impact of Payment Delays on Operational Uncertainty

Half of middle-market businesses say seeking and receiving payments significantly contributes to AR uncertainty.

Six in 10 middle-market firms in the lower revenue bracket, $100M–250M, find seeking and securing payments a significant source of AR uncertainty. Among the middle market’s largest firms, 43% of CFOs share this concern. The use of virtual cards to facilitate payment and the duration of payment terms play significant roles.

Adopting virtual cards as a payment method seems to mitigate some AR uncertainty. Among firms that have not embraced virtual cards, 58% report payment collection as a substantial AR issue. These firms are 13% more likely than those accepting virtual cards to cite AR as a significant contributor to uncertainty. Although 12% of virtual card adopters consider payment collection a negligible contributor to AR uncertainty — indicating it is not a concern — 0% of surveyed firms that do not accept virtual cards agree. In other words, all firms that do not accept virtual cards believe payment collection meaningfully contributes to AR uncertainty.

Data also shows that payment uncertainty costs increase with extended net terms, a finding that may seem paradoxical at first. Firms whose clients have more than 30 days to pay are 57% more likely to view payment collection as a significant contributor to AR uncertainty than those with shorter payment terms. Why? It could seem plausible that giving customers a longer timeframe would increase the likelihood of on-time payment.

However, longer net terms can also introduce cash flow gap issues for the supplier. Buyers who exert bargaining power to extract long payment terms can also exert bargaining power by paying late. In other words, the same buyers with greater bargaining power may be more focused on their own working capital than making good on timely payments — even if they set those terms for themselves.

CFOs Adapting Strategies for Efficient Invoice Collection

In a typical month, middle-market businesses receive 7.4% of their B2B payments late.

Timely payment collection is a significant concern for middle-market firms, particularly smaller players that often find themselves at a negotiating disadvantage. On average, middle-market firms must wrestle with 7.4% of their B2B payments arriving late each month, confirming payment delays’ prevalence across the middle market.

Of course, the disparity in late payment reception depends on enterprise size. Smaller firms receive more B2B payments late than the average, at 8.1%. Their larger counterparts report that 6.5% of B2B payments are late, meaning the rate for smaller middle-market firms is 25% higher.

As before, the length of payment terms plays a critical role in this dynamic. Firms with shorter payment terms (30 days or less) receive a slightly larger share of payments late, at 7.6%, than those with longer payment terms, at 7.2%. This adds to the implication that longer net terms may increase uncertainty but are linked to a slightly lower share of B2B payments received late.

A striking 47% of smaller middle-market firms report that their buyers often dictate payment terms. This scenario is less common among larger firms, where just 36% face this issue. All in all, a lack of negotiating clout and stringent payment terms combine to exacerbate smaller firms’ late payment challenges. Negotiating leverage levels show up in a smaller firm’s inability to reach more favorable net terms with business customers and in business customers being more likely to pay later than the net terms they set for themselves.

AR Uncertainty Can Exact a Hefty Toll

The cost of payment uncertainty is highest for middle-market businesses not accepting virtual cards: 4.6% of revenue.

Payment uncertainties lead to notable revenue losses. But virtual cards can play a significant role for middle-market firms addressing this challenge. Data shows that 60% of smaller middle-market firms received payments via virtual cards in the past six months. For larger firms, this share is 79%. This disparity extends to revenue loss trends.

The average middle-market firm reports losing 3.1% of its revenue, approximately $14 million, to uncertainties in payment collection. However, smaller middle-market firms experience a higher impact, losing 3.3% (or $6 million) of their revenue to payment uncertainties. In comparison, larger firms — which are 31% more likely to receive payments via virtual cards — report a lower impact proportionally to their revenue, losing just 1.8% to these uncertainties.

Middle-market firms accepting payment via virtual card report losing 2.5% (or $11 million, on average) of revenue to payment uncertainties. Those not accepting or offering virtual cards lose nearly twice as much (4.6% of revenues, or $20 million). Because virtual cards play a key role, integrating virtual card systems can help middle-market firms mitigate uncertainty.

Conclusion

Uncertainty can translate into significant losses. Prolonged payment terms exacerbate these uncertainties. Middle-market businesses allowing more than 30 days for payments experience a 4.6% revenue loss on average. In response to these challenges, 79% of CFOs are ready to invest in payment automation technologies, reflecting a strategic pivot toward digital solutions for mitigating AR uncertainties. Likewise, the enthusiasm for adopting virtual card technologies is evident. Seventy-eight percent of middle-market CFOs show high interest in accepting virtual cards that facilitate automated invoice approval and timely payment. Yet, the full potential of technologies like virtual cards is still unfolding. These insights emphasize that middle-market CFOs are ready to embrace technical innovation amid today’s complex economic environment.

Methodology

“The 2024 Certainty Project: Optimizing AR to Mitigate Uncertainty for Middle-Market Businesses” is the second edition of the PYMNTS Intelligence Certainty Project. This monthly project monitors trends and sentiment across operational areas of larger middle-market firms and small enterprise companies (between $100 million and $1 billion). Each month, the project rotates through CFOs, heads of payment and heads of operation to best capture the sources and costs of unpredictability and the strategies the C-suite relies on to help navigate complex and dynamic business environments.

This issue explores AR challenges, the role of virtual cards and the impact of billing terms on repayment trends for middle-market firms. It draws on results from a survey of 60 CFOs of companies with annual revenues between $100 million and $1 billion in 2023. Ninety-seven percent of the businesses have been in operation for 10 years or more; 3% between five and 10 years. The survey was conducted from Feb. 12 to Feb. 21.

Read the March 2024 report, “Measuring the Cost of Uncertainty on Middle-Market Businesses,” for more.