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  • Writer's pictureBain & Company

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

Innovative Solutions: How CFOs Should Use Automation to Make Improvements

The most obvious benefit for CFOs who automate financial processes—and eliminate paper invoices and reduce manual input—is lower overhead expense. Less re-keying is required, and less staff time is spent tracking down and reconciling invoices, especially with the errors inherent in manual processes.

The ultimate goal of automation is straight-through processing with virtually no human intervention. According to the 2015 IOFM study, less than half of surveyed companies post the majority of their receivables cleanly—straight through, without human intervention. Only 13 percent reported that more than 90 percent of their receivables post without human intervention.

The IOFM survey also showed that only one in four respondents receive remittance data through an electronic file that is automatically reconciled. But 69 percent either already receive most of their payments electronically or expect to within three years. While e-mailed invoices are an improvement over mailed invoices because of their instant delivery, e-mail more and more processes are automated, including electronic billing and invoicing, ever-more advanced analytics will be possible, including advanced payments modeling to help CFOs better predict and manage cash flow and working capital.

The 2014 Association for Financial Professionals Inc. survey, as well as a 2013 survey by Deloitte, has shown that both CFOs and treasury functions are playing more of a strategic role within the organization and will continue to do so in the future. One key driver of this transformation is automation. The measurement of sales, payments, and cash flow made possible by automation will shift AR into a strategic organizational role. Analytics, including predictive tools and real-time information, will help make that shift. When receivables visibility is improved—so the CFO can know with more certainty when invoices have been approved for payment and when payments will be made— it opens the door to financing options. The company can offer supply chain financing alternatives, or early payment discounts, knowing precisely what their effect will be on AR.

For a company with a dealer/distributor/vendor network, an emerging option is for the solution provider to make payments to the dealer/distributor/vendor in a regular, predictable manner on behalf of the purchaser. In this model, the provider is responsible for collecting payment from the purchaser. This outsourced credit service, known as “channel finance,” removes the costs of issuing and maintaining purchaser credit, completely eliminates customer default risk, and frees up working capital for the seller and its sales network.

Part of the CFO’s role as a leader is to anticipate how AR should change as the company grows. It is important to evaluate AR as a whole—its combined costs and functions-and not just the silos that appear to be the most troublesome. Many legacy automation providers are only able to address portions of the AR process; the most innovative providers can manage the full process from order receipt through cash application

A company that partners with a properly qualified third-party provider can expect to receive benefits beyond lower direct overhead costs. The CFO should evaluate service providers’ proficiency in core competencies that deliver all forms of tangible and intangible value to AR. For example, does the service provider have the expertise to take over credit and collections, and can it demonstrate that it will deliver better performance? How will it better manage the collections process, and how will it measure and demonstrate improved performance? How will it improve efficiency in billing, and how will it measure that efficiency? What analytics and forecasting capabilities does the solution offer, and how will the solution contribute to AR’s strategic value to the whole organization?

Technology is another key area where the service provider should be able to demonstrate a clear advantage over a company’s existing systems. The CFO should evaluate how the service provider’s technology expertise and implementation stacks up against the company’s internal IT team, which typically focuses its resources on technology in the company’s core competencies instead of back-office functions. It is critical for the CFO to weigh the organization’s best interests at the highest level and lead the push to AR automation, for benefits that extend beyond the remit of the typical IT team.

Bountiful Benefits: The Evolution of Electronic AR Solutions

Electronic solutions will inevitably replace printed-paper invoicing. IOFM’s 2015 study showed that 54 percent of the organizations surveyed had implemented electronic invoicing, with 4.8 percent planning to implement it in six months, 1.6 percent planning to implement it in 12 months, and 27 percent planning to implement it at some undefined point in the future. Only 12.7 percent of the respondents had no plans to implement electronic invoicing. As the adoption of automated AR solutions increases, so will the opportunities to use the data in new and interesting analytics. Electronically tracking the payment process allows companies to check into altered payments and evidence for why payments were altered and how they were approved. Applying analytics to every step of the payment process will help the CFO manage the company’s cash flow and understand buying patterns for improved financial forecasting.

Automating financial processes will also allow CFOs to grow revenues without adding overhead. Companies can reallocate staff (those that were previously devoted to re-keying and other manual processes) to other value-added initiatives to better accommodate customers, who are increasingly expecting to connect their own paperless AP systems with their suppliers’ electronic AR systems.

With cloud-based solutions, the company is not required to make a large investment in equipment or bespoke software. Cloud-based solutions also make it easier to adopt the most advanced software, along with the knowledge of how to use it and access to constant platform upgrades.

The working capital benefits of improving financial process performance should be a key incentive for CFOs. Automated solutions can accelerate payments, shrink DSO, reduce bad debt and even remove credit default risk. Outsourcing credit and collections activity to a well-qualified provider opens up the company’s resources to focus on its own business growth. Advanced solutions help companies stay ahead of their competition and open avenues to more innovation with payments—allowing discounts for early payments; helping distributors and dealers receive payment in full for approved receivables; and bringing in third-party financing alternatives for receivables. Channel finance solutions can take lag time away from national account payments to dealers/distributors/vendors or GPOs.

Conclusion: An Innovative Approach to AR For CFOs, improving financial process performance is an essential piece of their most important role: managing cash and working capital. The headaches of high average DSO, costs associated with chasing invoice or payment problems, and credit and collection duties—can be resolved by qualified third-party service providers, which can elevate AR departments to higher levels of electronic billing, invoicing and payments. As more companies automate invoicing and payments, they can apply innovative emerging financing solutions that use approved receivables to shorten or eliminate payment gaps. This is especially true for companies with networks of dealers or distributors and those with national account buyers. Automated financial processes will also yield advances in analytics. While increased adoption of electronic and outsourced AR solutions is inevitable, the CFO who takes a strategic approach with these solutions will achieve better cash and working capital management and, ultimately, bottom-line performance benefits.

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