Improving working capital seems to be a primary focus for corporations. Building a process to ensure more cash is coming into the business rather than going out, has a direct impact on the sustainability and success of the organization. A high number of companies fail because they were not mindful of tracking their revenues and expenses. A business can have a solid product or service but if solid financial processes are not in place, the business can evaporate. Automating the Account Receivables processes is one building block to improve cash flow.
In general, the Account Receivable process consists of the following key components:
Document
- Develop a process to record the sales incurred
- Ensure a consistent account system will be used to post sales
Produce
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Generate invoices and build controls to ensure they are sent on a regular basis
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Build controls and procedures to ensure invoices are consistently produced
Monitor
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Make sure someone is monitoring open invoices since this has a direct impact on cash flow
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Expand customer collection channels in order to meet their payment preferences
Automate
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Process the cash received and apply to the open receivables
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Reconcile the cash received to ensure the receivables are accurately stated
Most business must follow these steps to determine if they are winning or losing the battle of maintaining positive cash flow. The steps outlined above are key, however, it is important to remember that any financial process has many moving parts. Whether the company is a large multi-state utility or a county electric coop with only a few hundred consumers, these steps must be followed in building an Account Receivable process.
Currently, most financial professionals continue to identify a number of pain points in processing Account Receivables. The top pain points are indicated below:
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Inefficient paper posting process
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Re-keying of data in various places
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Manual processes create inefficiencies and posting errors
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Pressure to lower costs
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Challenges faced to improve internal controls
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Challenges in automating the ERP process for multiple receivable channels
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No remittance information received with the payment
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Late payments and unauthorized discounts
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Customer demand for additional payment channels resulting in dissatisfaction and attrition
In view of this, there are opportunities to build a process to improve working capital. An effective process will include the following three steps:
Evaluate
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Build processes to optimize working capital
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Quantify the optimization
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Realize that any adjustment will take time, so be patient
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Run comparisons against companies in your peer group
Go Digital
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Eliminate process and expand digital channels
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Leverage core ERP functionality
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Examine the process of posting the cash
Expand
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Investigate other areas for “electronification”
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Build Electronic Presentment and Payment processes
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Work with partners and vendors to expand automation
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Track and monitor the results
Although the points above focus on addressing the gaps with the Accounts Receivable process, it is just one side of improving cash flow. Before improving any process, an organization must evaluate their current environment. Once changes are implemented they can determine whether the change led to success or had no impact.
The current process can include building a baseline of the current environment. Here are a few points to consider:
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What is the current Days Sales Outstanding (DSO)?
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How does this compare to the organizations in my peer group?
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What is the current Cash Conversion Cycle (CCC)?
Quantifying these ratios and comparing the numbers once changes are implemented is key to improving the cash flow cycle. A reduction in the Days Sales Outstanding will open up additional cash that can now be infused into the business to support growth strategies, fund capital expenditures, fund expansion and strengthen the balance sheet. In addition, when an organization has an improved cash perspective, there are a number of initiatives that can be accomplished.
There are a number of ways a company can initiate a process to improve cash flow. For example, EBPP is one way to accomplish it. Companies that have employed an EBPP solution have improved margins and increased customer collection rates resulting in creating a positive cash flow. Automating the online bill payment and presentment can accelerate the posting of customer payments, accelerate DSO and reduce the posting of errors.
However, improving the Account Receivable posting is only one side of the equation. Consumer’s preference is causing more and more companies to evaluate their process and begin to explore processes to capture additional digital payments.
