Is Your AP Department Prepared for the Effects of a Recession?
The economic fallout of the pandemic has made managing working capital more difficult1.
• Day’s Payables Outstanding (DPO) is 7% higher than five years ago
• Day’s Sales Outstanding (DSO) stands at a five-year high
• Net Working Capital (NWC) days is at a five-year high
• Return on Invested Capital (ROIC) has fallen a five-year low
• Net debt is at a five-year high
But it’s likely that businesses are about to face another, potentially bigger, challenge: a recession.
While economists debate the likelihood that the economy will experience a “soft landing” or a “hard landing,” what’s clear is that businesses must prepare for economic turbulence in the quarters ahead.
Accounts Payable (AP) can play a big role in helping the business weather the financial storm. Efficient and effective invoice-to-pay processes provide the sustainability, adaptability, visibility, and control that businesses need during tough economic times. And automation frees AP staff to focus more time on data analysis and other high-value activities that assist in working capital management.
The Macroeconomic Situation
Economic storm clouds are gathering.
- A recession appears inevitable. The combination of rising interest rates, high inflation, clogged supply chains, and geo-political unrest are straining the global economy. The U.S. gross domestic product (GDP) fell in the first and second quarter of 20222. Two consecutive quarters of falling GDP growth has historically been seen as a strong indicator of a recession.
- Business leaders are bracing for a downturn: 68% percent of CEOs expect the Federal Reserve’s war on inflation to eventually trigger a recession3. As a result, the mood in the C-Suite is darkening in preparation of a worst-case scenario. CEO confidence has dropped to its lowest level since the start of the pandemic4. 50% of businesses and 63% of Fortune 1000 firms are planning layoffs in the coming months5. Other businesses have implemented a hiring freeze to avoid mass layoffs during a recession.
- The labor crunch is complicating things: 44% of business leaders are rescinding job offers6. But fast-changing economic conditions have not changed the need for businesses to ensure that they have the specialized talent they require to grow and succeed. Businesses must leverage creative approaches to talent acquisition and retention such as expanding remote work options, pursuing acquisitions to gain access to talent, customizing human resources strategies, and digitally transforming their workplace.
At present, talent acquisition and retention are the second-highest risk in the eyes of executives7.
Navigating these economic headwinds will be challenging for businesses.
Thriving During Economic Uncertainty
There are four things that help business drive through the challenges and uncertainties of a potential recession:
- Sustainability. Building efficiencies and creating cost controls are critical during an economic downturn. Businesses cannot afford to have resources tied up in low-value tasks.
- Adaptability. If there’s one lesson that businesses learned during the pandemic, it’s that they must be ready for anything. Businesses cannot risk being caught flatfooted if the economy craters, business requirements change, or disruptive competitors emerge.
- Visibility. Visibility in invoice data means more in tough economic times. Real-time visibility into cash flow and corporate spending enable businesses to understand their short-term and long-term working capital needs, identify potential gaps, and proactively adjust.
- Control. When the economy is booming, it’s tempting for businesses to become lax about controlling where their money is going. But a recession is no time to allow erroneous payments, maverick spending, and fraudulent transactions to chip away at corporate profits.
These attributes create a solid foundation for success, no matter the economic situation.
Today, 78% of finance and AP leaders would like to support business growth without adding AP staff8. Against this backdrop, the priorities of CFOs will shift during a recession toward:
- Improvements in efficiency. Doing more with less is critical when revenues decline. CFOs will look for ways to efficiently scale corporate operations without hiring additional staff.
- Cost controls. An economic downturn will put more pressure on CFOs to conserve cash and protect margins from unmanaged or wasteful corporate spending. Spend will be scrutinized. Finance departments will be counted upon to control costs through the elimination of manual work, the reduction of invoice disputes, and fraud mitigation. Finance departments also will be expected to bring insight to optimize the way the organization spends its money.
- Business agility. To stay ahead of the curve and effectively adjust for whatever the future holds, CFOs must leverage insights to proactively adjust the way the business manages its money. Everything will be up for discussion. And CFOs cannot afford unpleasant surprises caused by a slow financial close. An organization’s fiscal health may depend on having actionable cash flow insights, agile monthly forecasting, and real-time spend visibility.
Manual AP processes are inefficient and costly, making it challenging to protect cash flow and control spending during a recession. Additionally, they provide no return on investment (ROI), which is paramount to CFOs during economic uncertainty. Implementing AP Automation ensures that finance departments can grow and thrive despite positive or adverse economic conditions.
To read our white paper on how AP automation helps protect against the effects of a recession, click here.
1PriceWaterhouseCoopers, Working Capital Report 2021/22
2Bureau of Economic Analysis (BEA), 2022
3The Conference Board, 2022
4The Conference Board, 2022
5PriceWaterhouseCoopers, Pulse Survey, 2022
6PriceWaterhouseCoopers, Pulse Survey, 2022
7PriceWaterhouseCoopers, Pulse Survey, 2022