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  • Writer's pictureBain & Company

The CFO’s Guide to Automating Accounts Receivable - Electronic invoicing is changing the AR landscap

Introduction: CFOs Look for Innovative Improvements to Accounts Receivable

Accounts receivable (AR) is a top concern for today’s chief financial officers. And that’s no surprise, considering how improvements in AR performance lead to getting paid faster and more efficiently, which is directly connected to healthy cash flow and increasing working capital.

Financial processing issues can be even more acute for companies with networks of dealers, distributors or vendors, as well as for group purchasing organizations, because national account customers can often pay inconsistently and past terms. This article explores AR problems—the areas where performance tends to suffer and considerations for CFOs to take into account when evaluating potential changes. More importantly, it shows how electronic and outsourced solutions can improve performance and lead to both strategic and bottom-line benefits for CFOs. It also reviews the current thinking from CFOs on AR-related issues, as shown in studies by the Association for Financial Professionals (AFP) and the Institute of Finance & Management (IOFM)—industry groups that represent finance executives and help set standards of excellence in their field.

Avoiding Inefficiencies: Common AR Performance Pitfalls Studies have shown that CFOs believe their most important role is managing cash and working capital. To help themselves in that role, especially during periods when revenue growth is difficult, CFOs naturally will turn to improving the effectiveness of their accounts receivable department. One of the chief benchmarks of AR performance is Days Sales Outstanding, or DSO, and most of the CFOs surveyed for the Institute of Finance & Management’s 2015 AR Automation Study reported that reducing DSO was their highest priority. Other surveys of AR departments have shown that DSO is considered the top measurement of performance and that the top priority in 2016 is improving DSO.

In the U.S., most companies require 30-day payment terms. But in reality—according to the 2015 IOFM study—most companies have an average DSO of more than 30, including 13 percent of companies with a DSO of more than 50. Companies that do not receive payments on time can suffer from anemic cash flow, which makes strategic planning, forecasting, and overall business growth more difficult.

Where does AR typically lack? Inefficient processes is the most notable area in 2016. Many companies fail to establish a centralized billing system, relying instead on their distributors or dealers to perform AR duties. This arrangement can leave distributors, dealers and vendors to chase payments from their national account customers instead of focusing on business growth. Managing invoice exceptions can take weeks, driving up DSO. According to the IOFM, paper-based receivables generate an exception rate of 5 percent to 20 percent, depending on the industry and complexity of the receivables, compared to 1 percent to 2 percent for best-in-class electronic receivables. About three-quarters of all reconciliations for inaccurate payments requires a manual re-keying of the information.

Manual processes also add time. Paper payments—the traditional paper checks with invoice stubs paid through the mail—always had to be manually keyed before reconciliation. But even the advent of electronic payments has not eliminated re-keying. Of the companies surveyed for the 2015 IOFM study, 51 percent received emailed remittance data that had to be re-keyed. With mailed remittances, 49 percent of them have to be re-keyed

Many AR systems also suffer from a lack of customer and sales analytics. Without the technology needed to analyze purchasing and payment patterns, many companies are falling behind their competitors. And without the needed technology, there can be no data-based real-time insight or analysis, resulting in a limited strategic role for AR in the organization.

Delays caused by paper invoicing represent about 60 percent of all AR costs, in addition to the expense of processing paper check payments as compared to an all-electronic payment solution. Many companies simply write off any disputed amount when a short-payment situation arises in their paper-invoicing systems because it is cheaper than their reconciliation process. For invoice disputes and other payment disagreements, 21 percent of the companies in the IOFM 2015 study lose at least $250,000 per year. That includes 5 percent of the companies that lose $2 million or more per year and 3 percent that lose $1 million to $2 million.

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