Accounts Receivable Performance

Transcription

1 Accounts Receivable Performance DOING OK IS NO LONGER GOOD ENOUGH AUTHOR Mary Driscoll Senior Research Fellow APQC When embarking on accounts receivable (AR) process improvement, it s smart to start by benchmarking costs, cycle times, and error rates. This report demonstrates how AR process benchmarking can help you build a framework for high-impact change. We also look at costs and costdrivers that often slip under the radar, and we illustrate how best-practice AR organizations ferret them out. Finally, we argue that valuable staff resources can and should be focused on customer advocacy, an important driver of cash-collection performance. Research conducted by Research sponsored by

2 Introduction Chances are, you think your accounts receivable (AR) process is in solid shape. The last time you looked, operating costs seemed to be at the right level. Staff productivity looked OK. And during the financial crisis, steps were taken by credit and collections managers to keep days sales outstanding (DSO) from soaring. But there are several reasons why it makes sense to look again. First, traditional postal services around the world are facing challenges. The U.S. Postal Service (USPS), for example, recently proposed to eliminate next-day delivery for first-class mail and switch to two-to-three days. In the U.K., mail strikes have been disruptive and significant increases in postage costs have already been implemented. Clearly, companies in these locales that send lots of invoices to customers in paper form ought to be concerned about cash collection. Second, as the global economy begins to grow, AR teams will face growing processing loads. Given that many organizations cut headcount during the recession, this coming deluge of work mostly paper-driven and manually performed will swamp the typical AR team. Third, during the global economic crisis, CFOs developed a fine taste for productivity gains. Now, they are looking for better-than-ever improvement strides in financial management (FM) processes. 1 We expect that more AR and accounts payable (AP) directors will be asked to evaluate change programs that streamline and automate corporate billing and payment functions, respectively. Finally, it s highly likely that there are hidden operating costs that can be targeted or, at the very least, better understood. The reason some costs remain obscure is that organizations tend to allocate costs according to function, not process. For example, some portion of the cost of mailing paper invoices may currently land on the budget of the corporate mail facility. It might make economic sense to examine this. Taken together, these pressures argue in favor of AR process optimization. This white paper examines opportunities for boosting the productivity, efficiency, and quality of activities that are AR bedrock. The benefits include: reduced process costs, movement of staff from low-value to high-value tasks, compressed cycle times for cash collection, reduced manual data entry and, hence, lower error rates and fewer payment holds, 1 Driscoll, Mary. "Financial Improvement Programs Now Aim at Both Value and Cost." APQC Knowledge Base, Page 2

3 better visibility of cash-flow drivers and control, and reduced paper usage and a better carbon footprint. Close-Up: The Costs of AR-Related Processes To learn whether AR processes are efficient and productive enough, organizations benchmark specific activities across several dimensions: cost, staff productivity, cycle time, and error rate. The primary goals are to learn where you stand relative to peers and to isolate the potential ROI of investing in process improvement. Many enterprises do this by tapping into APQC s Open Standards Benchmarking program. This global resource was built in 2004 using the widely adopted APQC Process Classification Framework, which features more than 1,200 standardized measures spanning people, process, and technology. APQC s seven-step validation process ensures the highest level of accuracy of data and provides participants with detailed reports across varying peer groups. APQC is a member-supported, non-profit organization. Figure 1 depicts the cost of generating and submitting an invoice to a customer. There are two views: 1. All 154 participants in APQC s AR benchmarking survey, regardless of size, and participants with more than $5 billion in annual revenue. This cost is calculated by taking the total cost of the process and dividing it by the total number of invoices processed annually. Looking at the all participants view, we see a dramatic difference between those organizations in the top-performer category ($1.17 per invoice) and those in the bottom-performer group ($39.61). The median performance level ($7.65) also lags the top performers significantly. 2 The all participants view is useful, but it helps to focus more closely, forcing an apples to apples comparison. For example, we see that among the group of large organizations, those with more than $5 billion in revenue each year, top performers spend about 80 percent less to prepare and distribute invoices than enterprises in the middle of the pack, and about 89 percent less than those in the rear. 2 The top quartile is the performance level above which 25% of all responses occur. The bottom quartile is the performance level above which 75% of all responses occur. The median is the middle value in a set of values that are arranged in ascending or descending order. Page 3

4 Total Cost of Submitting an Invoice $50 $45 $40 $35 $30 $25 $20 $15 $10 $5 $- $45.98 $39.61 $25.12 $7.65 $4.94 $1.17 Bottom Performer Median Performer Top Performer All Participants N = 154 Revenue > $5 Billion N = 19 Figure 1 How do the top performers do it? The answer, in short, is that the pioneers (who are in the minority at the moment) cut way back on the number of invoices they present to customers using paper. The good news for those who want to move up the maturity curve is that there is plenty of opportunity to reap cost-savings here. Approximately 86 percent of organizations who participated in a third-party survey reported that they submit invoices today in paper form. 3 Seventy percent report sending invoices via or fax. Either way, there is a lot of paper handling, envelope stuffing, file uploading, or scanning involved. With labor costs representing the biggest contributor to the overall cost of financial operations, the answer has to be streamlining and automating core AR workflows. That means investing in a solution that offers the ability to automatically present bills in formats that the customer prefers, whether it s a supplier-created web portal, buyer web portal, or a third-party e- invoicing solution. Surely, you need to be customer friendly you cannot force them to receive invoices they are not set up to accept. Still, it is entirely possible to automate the AR end of the billing-to-collection cycle to cut processing costs significantly. Some solution providers in this space promise to reduce AR processing costs in the 40-to-60 percent range. It s no coincidence, perhaps, that APQC finds a growing number of CFOs and their teams looking at mature technology solutions that can easily integrate with existing financial management systems. 3 A survey conducted in January 2012 by OB10, a global e-invoicing network, and The Institute of Financial Operations, a not-for-profit, guidance-setting association for the accounts payable and the accounts receivable profession. Page 4

5 Better still, automating steps across the spectrum of AR activities addresses costs that are not easily isolated by benchmarking. These costs stem from: time spent printing, stuffing envelopes, and mailing invoices, office equipment needed to print out billing data or invoices on paper, which then has to be delivered to customers, paper and postage, use of mail room equipment and staff to mail out invoices, time spent chasing unpaid invoices, and time spent managing disputes due to billing errors introduced during manual data re-keying. The reason some of these costs are not clearly detected by high-level benchmarking often rests with less-than-exact cost allocations. For example, some AR-related work may be carried out by staff that belongs to the corporate mail facility, and their costs may never be fully attributed to AR. So, AR will tend to under-report its total cost of customer invoicing. This is the kind of detail that some senior finance executives now want to examine and address. Further evidence of the opportunities to reduce costs appears in Figure 2 and Figure 3. These perspectives involve: 1. the average size of the staff needed to get invoices out to customers over the course of a year and 2. the relative productivity of the individual full-time equivalent (FTE). Once again, gaps between the top and bottom performers are staggering. And once again, automation is the key. Note that finance organizations that are truly committed to continuous process improvement aim much higher than headcount reduction. The end-game is to liberate talented staff from routine, low-value chores and apply them instead to analytical tasks that can make a difference to business performance. One example: liberating AR people so they can better understand the root causes of payment-pattern aberrations. AR aging can tell you when customers are past due, but that exercise won t explain why payments are sometimes held back. If you can assign people to isolate the root causes of recurring payment halts, you may find that there are things your organization can do differently to prevent them. Page 5

6 Number of FTEs Processing Customer Invoices per $1 Billion Revenue Bottom Performer Median Performer Top Performer N = 236 Figure 2 Number of Invoices Processed per Assigned FTE 60,000 56,000 50,000 40,000 30,000 20,000 10,000-12,801 2,556 Bottom Performer Median Performer Top Performer N = 189 Figure 3 Page 6

7 Liberating Talent for Truly Value- Adding Work To fully appreciate the productivity boost possible in AR, it helps to work through the math and determine how much money can be saved by reducing the number of FTEs allocated to customer invoicing. Here s a hypothetical case: a company receives and processes 50,000 customer payments annually, and it spends on average $56,000 in personnel costs per FTE. Let s assume that the average FTE handles 11,000 receipts per year, which is the median figure for this metric. The company needs 4.5 FTEs to manage this processing load. But if this company could double its staff productivity so that each FTE handled 22,000 (not 11,000) receipts, it could enjoy a cost savings of $127,000 because the number of needed FTEs would fall from 4.5 to 2.3. Alternatively, these FTEs can focus on higher-value activities such as analyzing customer payment patterns or working with the treasury department to generate more precise views of cash-flow drivers. One can easily imagine a whole host of value-adding work that could be tackled. GETTING THE RIGHT PEOPLE IN THE RIGHT JOBS Is the analytical talent that resides in your AR staff leveraged properly? The answer has to be no if staffers are tasked with manually-driven tasks such as paper-based invoicing and payment processing. Consider this: many large corporations (that are not financially stressed) are more than happy to pay their bills within a consistent timeframe; for example, 30 days after the date the invoice was received. When they are noticeably late, there is usually a problem that has triggered a payment hold, (perhaps they don t pay invoices when they have received a partial shipment). You can increase the likelihood that key accounts will pay on time by modeling their payment trends and (a) identifying process constraints and (b) mistake-drivers (Figure 4 shows how top performers have 97.8 percent of invoiced items paid in full the first time). Eventually, you want to join the top performers, as illustrated in Figure 7. Getting there, however, requires effective analytical work on behalf of AR staff. Page 7

8 Percentage of Invoiced Line Items Paid in Full the First Time 100% 97.8% 95% 94.0% 90% 85% 84.0% 80% 75% Bottom Performer Median Performer Top Performer N = 288 Figure 4 When AR staffers are liberated from the tedium of generating and sending out paper invoices, they can turn their attention to more value-adding activities such as payment-pattern analysis. And directing their focus in this manner can lead to process improvements that allow you to better manage DSO. Here are other value-adding tasks for those people who no longer have to manually generate and send out invoices: establish procedures to increase effective monitoring of past-due invoices, identify customers who usually take cash discounts and have a history of using these, and inquire immediately if the discount date is missed, establish a split routine to examine past-due invoices, one for revenue volume and one for product segment, or use AR aging, view customers past-due invoices (by five or 10 days), and run this weekly or biweekly. The point is to identify payment issues and resolve them quickly. Improve Processes to Ensure Timely Cash Collection It is also vital to examine the operational drivers across the cash-conversion cycle. One focus in this paper is DSO. Start by identifying how much working capital is unnecessarily trapped in your Page 8

9 receivables balance. Then study whether there are steps you can take to address the situation. In the short term, you probably cannot influence the ways in which your key-account sales staff strike deals and set payment terms in a tough marketplace. But process improvements can make a meaningful impact. For example, you may learn that you can increase the efficiency and effectiveness of your billing processes and cut a day or more off your DSO metric. There are clearly opportunities here. We see large gaps (between the best and worst performers) when looking at the time it takes to create error-free invoices. Figure 5 shows the relative performance of all participants in APQC s Open Standards Benchmarking database in accounts receivable, along with a look at one industry-specific cut of the data: durable goods. As mentioned earlier, looking at the all participants view is a first step only. Once you start to compare peer groups, in this case industry peers, you get a clearer view of what you can achieve by addressing process weak spots. Average Cycle Time in Days to Generate Complete and Correct Billing Data Bottom Performer Median Performer Top Performer All Participants N = 540 Durable Goods (Aerospace, Automotive, and Industial Products) N = 82 Figure 5 The chart above clearly indicates that the top performers, using both views of the data, have a significant jump on the worst performers. We can argue with assurance that many of the top performers have taken steps to rid their billing processes of the root causes of invoice errors, which are the primary drivers of payment hold-ups. By streamlining the billing process to reduce error-drivers, cycle speed is also accelerated. Moreover, we can assert that those organizations that have automated the process for generating invoices are most likely to find themselves in the top performing category. Page 9

10 Cutting Invoice-Dispute Times Disputes with customers over what exactly was procured, received, and billed is another difficult area. Figure 6 looks at the time it takes to resolve an invoice error. The top performers move nearly four times faster when it comes to sorting out invoice errors. The take-away here is: if you can liberate AR talent from paper-shuffling tasks (see Liberating Staff for Truly Value- Adding Work above), you can devote that high-i.q. talent to customer-focused service and position your AR people as customer advocates. For example, you may set out to reduce the amount of time AR staff spends on manual cash applications. If that effort succeeds, the staff will have more time to spend on credit- or collections-related work. Cycle Time in Days to Resolve an Invoice Error Bottom Performer Median Performer Top Performer N = 469 Figure 6 There are a number of attractive alternatives to submitting paper invoices through the mail. Sending invoices by , for example, can certainly help reduce the time it takes for paper to be delivered to your customer s office. Some organizations also rely on faxing their invoices, hoping to reduce by a day or two the time it takes for invoices to arrive by mail. Although these options hold some benefit, they are far less efficient than electronic solutions such as a supplier portal, customer portal, electronic data interchange (EDI), or an e-invoicing network. There are a number of organizations that offer portals to their customers as a way to streamline their own invoice submission processes. But, not all customers will be inclined to connect to and accept invoices from these portals, as most deal with dozens if not hundreds of different suppliers with different portal structures. Customers may also have their own portals, and the challenge for suppliers can be tailoring invoices for several different customers using many Page 10

11 unique portals. Although EDI is oftentimes more attractive than paper, , and fax, it usually requires heavy IT investment and a separate connection for each customer. Alternatively, a welldesigned e-invoicing network not only significantly streamlines the invoice submission process, but also allows an organization to submit invoices from virtually any type of billing system, offering the convenience of sending invoices to multiple customers using a single connection. Surely, your customers will insist that they retain choice over how invoices are presented to their AP departments. You cannot force them. Rather, you want to offer suitable choices as they evolve their own AP functions. E-invoicing, of course, is instant and continuous. From the supplier s perspective, there is no longer any need to use a batch processing approach, which by definition means some invoices wait for others to catch up. Meanwhile, the invoice receiver gains important leverage over operating costs and the opportunity to boost FTE productivity. Customers pushing the envelope can leverage e-invoicing to gain better control over cash flow and to reduce working capital requirements. The Power of Cutting DSO So, what could be the hard-dollar cash-flow boost of an AR process improvement that cuts DSO by, say, a portion of a day, or even a full day? Evidence for the power of DSO improvement comes from Dr. Stephen Timme, an internationally known expert in working capital management. He is currently an adjunct professor at the Georgia Institute of Technology and president of FinListics Solutions, a financial software and analytical services firm. His model below shows, for example, that a median performing company with $30 billion in revenue that can cut cycle time by 20 percent (actually less than one day) can witness an estimated one-time $34 million increase in balance sheet cash (Figure 7). Page 11

12 DSO Operational KPI Improvement Example 4 A Final Word Figure 7 The principles, concepts, and enabling technologies that can move corporate payment systems into the digital age are now relatively advanced. So, take a page from the pioneers and investigate not only the potential one-time cost-savings (the efficiency play), but also the myriad benefits to be gained from pushing for process and resource effectiveness. Our research finds that the top performers: cut way back on the number of invoices they present to customers using paper. Top performing companies streamline and automate core AR workflows by investing in a solution that offers the ability to automatically present bills in formats that the customer prefers, 4 Though inspired by a real company, this example does not represent a specific situation at an existing company. Any resemblance to an actual entity is unintended. This example was developed solely as an illustration for discussion and is not intended to serve as an endorsement, source of primary data, or illustration of effective or ineffective management. Page 12

13 are able to identify costs that are not easily isolated by benchmarking, such as time spent handling and mailing invoices, paper and postage, use of mail room, and time spent managing disputes, liberate talent by having staff members work on value-added tasks. They can make a greater impact by focusing on establishing clear procedures for past-due invoices, monitoring whether customers are taking advantage of early-pay discounts, or determining whether insights about past-due invoices can be gained by categorizing by revenue volume or product segment look for ways to reduce invoice-dispute times by having members of staff positioned as customer advocates focused on customer advocates, and pay close attention to how they can reduce cycle times to generate complete and correct billing data, knowing that any reduction in DSO can have a positive impact on their organization s cash position. ABOUT APQC APQC is a member-based nonprofit and one of the leading proponents of benchmarking and best practice business research. Working with more than 500 organizations worldwide in all industries, APQC focuses on providing organizations with the information they need to work smarter, faster, and with confidence. Every day we uncover the processes and practices that push organizations from good to great. Visit us at and learn how you can make best practices your practices. Page 13

14 SPONSOR S PERSPECTIVE About the Research OB10 sponsored this research because of a desire expressed by accounts receivable and credit professionals for information regarding the costs associated with the invoice submission process. We believe organizations will benefit from this information and be better equipped to make more informed decisions regarding their invoice-submission practices. About OB10 OB10 is the leading global B2B e-invoicing network. Founded in 2000, the company has emerged as the world's most trusted e-invoicing network, providing a secure global service. The OB10 Network enables companies to send and receive error free, tax compliant invoices around the globe without the need to install any additional hardware or software. More than 130 multinational clients receive electronic invoice data from over 120,000 suppliers operating in 150 countries. Customers of all sizes optimize their invoice processes with OB10 and benefit from improved efficiency and transparency. OB10 e-invoicing completely removes paper from the invoice process. The solution results in no paper, scanning, or OCR. Just straight-through, machine-to-machine processing of validated invoice data from a supplier s billing system directly into its customer's accounts payable system. Through its comprehensive enrollment program that connects suppliers to the OB10 network through a time-tested process, OB10 enables more than 120,000 suppliers to send paperless invoices simply and quickly. OB10 will engage, educate, and enroll a company s suppliers regardless of their geographic location using its multi-lingual supplier enrollment team. This allows suppliers to take advantage of a solution that is non-intrusive to its internal business processes, cost effective, and easy to use. In addition to e-invoicing, OB10 offers a complete range of related solutions such as purchaseorder services, payment-status services, invoice archiving and a discount-capture capability. To learn more about OB10, visit our website at Editor s note: This research program was made possible with funding by OB10; however, APQC remains solely responsible for the data and analysis offered. Copyright 2012 APQC, 123 North Post Oak Lane, Third Floor, Houston, Texas USA All terms such as company and product names appearing in this work may be trademarks or registered trademarks of their respective owners. This report cannot by reproduced or transmitted in any form or by any means electronic or mechanical, including photocopying, faxing, recording, or information storage and retrieval. Page 14

15