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12 Ways to Improve A/R Working Capital, Today

Accounts Receivable performance has been deteriorating for two-thirds of the largest companies in America. Over the last two years alone, the time it takes to convert an invoice into cash, as measured by Days Sales Outstanding (DSO), is up by an average of 10%. Each day your cash is unnecessarily tied up in receivables processes, your liquidity is constrained and that is costing you potentially millions of dollars a year.

12 Ways to Improve A/R Working Capital, Today
Industry experts like Ernst & Young, Aberdeen and the Hackett Group all agree there is tremendous opportunity today for companies to free-up additional liquidity from their internal working capital and Accounts Receivable is typically the #1 source. But how do you implement changes that are effective, compliant and sustainable?

Two of the largest problems prohibiting access to receivables liquidity are incompatible ERP systems and informal, manual processes managed on spreadsheets and disconnected databases. Without the ability to generate an accurate and timely roll-up of all this disparate departmental data, it is very difficult to even see where the receivables problems are, let alone fix them.

If you are like most companies, your receivables are somewhere around 10% of your sales revenue. For others, receivables can easily exceed 25% of sales revenue which can lead to significant liquidity problems. The key is finding methods and tools to help you improve invoice-to-cash cycle times.

Here are twelve practical ways to help improve invoice-to-cash processes that will increase available working capital and your company’s overall liquidity:

1. A/R Accuracy : Knowing how much you have in outstanding receivables seems like such a simple concept. But, when you add in all the complexities surrounding deductions, disputes, short-pays, broken promises, parent-child hierarchies, second and third party billings, progress payments, billable versus non-billable and complex payment terms…you have a lot to deal with, without much informational help.

Add to this fact, the complexity of having multiple accounting systems located in multiple cities, having multiple collector/resolvers calling on the same account because they buy from each of your multiple business units internationally…knowing exactly how much A/R is collectable today, in 30 days and in 60 days takes too much time manually.

What is needed is a consolidated and actionable view to A/R within one information system. Typically the system of record or ERP system does not provide this capability due to design constraints and the complexity and expense to customize it. An intermediary system that is specifically designed to aggregate AR information across multiple and disparate sources will provide the critical workbench and toolsets to the teams responsible for converting cash, resolving disputes, assigning and rating risk credit, tasking daily activity and delivering working capital results.

2. Be A/R Proactive : When it comes to A/R optimization, pro-activity is the key. You need to be contacting customers well before term and with multiple touches/reminders, in order to assure you receive payment at or very near term…and through this whole process, you need to working at uncovering future disputes and deductions. Remember the age old adage “An ounce of prevention, is worth a pound of cure”. Well, when it comes to A/R Working Capital: A Day of Prevention is worth six to eight weeks of dispute resolution. Avoiding post-term disputes by communicating with your customers prior to term date will give you a 30-40:1 advantage and you need to be exploiting this every day.

With available Cloud Technology you can cost effectively prevent many transaction and process problems by proactively communicating expectations, risks and meaningful business intelligence across the organization to help facilitate fulfillment and cash collection efforts. Make sure everybody (sales, service, finance, accounting, marketing) knows the latest conditions of the client base relative to their changing payment patterns. Focusing on proactive collections and communications will help you avoid DSO/DTP/DPD/DDO deterioration.

3. A/R Touches : One of the most important aspects of converting A/R working capital is the ability to increase your A/R “Touches”. Most clients we talk to are touching only 40% to 50% of the receivables base each 30 day cycle. This is typically a factor of resource availability. There are only so many hours in a day and only so much headcount you can cost effectively apply to an order to cash process. However, if you are not touching each and every receivables customer every 30 day cycle with a scalable, systematic and proactive workflow, you cannot assure that processes are streamlined and optimized.

4. A/R Metrics : Can you easily determine DSO, DTP, DPD and DDO are for each individual account and the entire customer entity, which may include multiple children, grandchildren or agencies involved in placing orders and holding outstanding balances with you? These calculations need to be accurate and complete for each of your business units, sales regions, and product divisions.

The information also needs to be accessible in seconds by your collection teams while interacting with the payables departments of your customers to maximize contact effectiveness and deliver more first-call-resolutions. Your system also needs to be guiding collectors and resolvers to initiate timely actions based on performance metrics for the whole client company. Every missing piece of the equation will reduce your effectiveness in assigning tasks, executing workflow and tracking group and individual productivity; impeding the release of working capital.

5. Payment Behavior : It is very important to keep track of customer payment behavior. Not only do these reflect your ability to convert cash more efficiently, they reflect your risk levels with those customers, which increases proportionally to the delays and increased debt exposure. Events such as Broken Promises and Material Deductions should literally send up electronic red flags in your system and trigger automated workflow with appropriate escalations and required sign-off.

This action needs to be automated and trackable with SLA’s (service level agreements) with the internal constituents in your and other departments within your company. Set your automated tracking to watch for delays of any kind and keep flagging accounts whose patterns are deteriorating. Call the customers and ask them about it- armed with the facts Try and find a partnering solution that meets both of your needs.

6. Deductions & Disputes : Are deductions and disputes increasing in absolute terms and as a percentage of your overall receivables? It’s important to understand the root-causes driving the deductions to improve process quality and prevent revenue leakages well as to be able to systematically workflow and measure dispute resolution cycles for every dispute type. As we discussed, you can prevent many deductions that occur post-term, by catching them pre-term with a proactive outreach to the customer.

Knowing what is causing deductions is key to avoiding these same deductions in the future. This information will provide meaningful guidance to finance and other departments such as sales, services, marketing and product development and help them employ up-stream measures to prevent many deductions and their costly ripple effect on working capital. (I encourage you to read Gary Lynam’s paper: Seven Best Practices for Effective Deductions Management)

7. 80/20 Rule is History : Don’t get stuck with the “80/20 Rule” thinking. Change your paradigm to the new “100/100 Rule” for A/R management. It is typical to see companies focusing on the 20-30% of the customer base that generates the 70-80% of the revenue…but that still leaves a lot of customers (actually the majority in terms of number of accounts and transactions) that do not get touched each cycle. Employ automation and touch 100% of the receivables customers each month and get the most out of your A/R Working Capital. Leveraging A/R focused automation with dynamically segmented account treatments, intelligent tasking and workflow and process that is automatically generated so you are not having to do everything manually.

8. Crystal Clear Communications : During proactive communication with your customers, ask if the invoices were received, if they are clear and accurate, consistent with contract terms, reflect sales specials or promotions that they believe they should receive, that their three-way-matching requirements have been met and that the invoice has been approved to pay. If not, start identifying the problems that are preventing timely payments and record them in your system for future reporting and root-cause analytics.

Credit terms and discount entitlement are often the cause of delays and confusion. Often, credit terms get lost in the translation of general payment terms and what is on the books in the client’s payables department and on the desk of the agent assigned to your account. Consider also that your client’s A/P staff and resolvers may be experiencing staff turn-over and you may have a new person to work with. Confirm and reconfirm they understand the credit terms, conditions and timing.

9. Don’t Be DPO Fodder : Consider also that your clients may be trying to optimize their working capital by practicing DPO (days payable outstanding) optimization methodologies – which is a euphemism for slow-pay. Stay on top of changing payment trends and ahead of the payment curve by proactively communicating with your customers and becoming one of the exceptions to their DPO payment strategy.

10. Even if Revenue are Down : Even if your company is experiencing declining revenue cycles, you can still improve working capital and liquidity with good processes supported by good information systems that deliver actionable data on a timely and automated basis. In every business cycle you need to be working on improving the value and productivity of your resources, especially if business is flat or declining, because that is where you can release more needed cash to your operations. Change your thinking about declining revenue and look for ways to empower your people with tools that help them improve available cash.

11. Bonuses Tied To Working Capital : There is a wise old adage that “People will not always do what you expect them to do, want them to do, or hope that they will do…but they will almost always do what you compensate them to do.” This is absolutely true for sales people, because their words and actions bring in deals that lead to dollars that fuels the company.

A sharp and well oiled invoice-to-cash team is a tremendous asset for optimizing a company’s available working capital, but it is amazing to see how few Credit & Collections teams are actually incented on improving key working capital metrics like DSO, DTP and DPD.

Find a way to incent your teams. Review historical averages and take a baseline of these cyclical key metrics. Set a goal and reward the individuals, teams and departments that literally save you money by freeing up critical working capital trapped in your current invoice-to-cash processes. Reward creativity and inspire exceptional contributions from others in the process – many companies are setting and exceeding working capital objectives; make sure your company is one of them.

12. You Need Good Information Systems : Most of the experts agree that the majority of accounts receivable issues are due to the fact that ERP systems do not support highly efficient invoice-to-cash workflow, are very difficult to operate and even harder to alter/adapt to required business changes. As a result the invoice-to-cash methodology, workflows, reporting, productivity levels, team cooperation, interaction with sales, support of management objectives and ultimately the relationship with the receivables client, suffers and the conversion of receivables into operating cash suffers with it.

Follow as many of these recommendations as your tools and information systems will permit. Evaluate alternatives, and don’t settle for the classic “We can’t do that any time soon” from your technical support teams because your finance team, your stakeholders, your customers and you deserve better.

There are innovative and cost effective technologies available today specifically designed to improve your working capital metrics, your Accounts Receivable and your liquidity, not three years from now, but Today.

Bradley Palmer - VP Business Development - Akritiv Technologies

Bradley drives the Business Development, Channel Strategy and International functions at Akritiv. He is a veteran in Technology sales and marketing, and uniquely qualified in the domain of working capital optimization.

Jeudi 30 Août 2012