A Strategic Perspective of Accounts Receivable Management. Date: May 23,

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1 A Strategic Perspective of Accounts Receivable Management Date: May 23,

2 Discussion Agenda Introduction Bottom Line Objectives Strategy Quote to Cash Process Field Tested Tactics Case Studies: Successes & Disasters Questions 2

3 Introduction Receivables Management is a tough job. AR fiduciaries: are like referees manage all of the company s revenue and one of its largest assets; 99% collection isn t good enough are a service touch point for customers must promote revenue but control risk are accountable for AR results without controlling all the determinants (upstream processes, economy, etc.) practice as much art as science must do it all for one to two tenths of a percent of revenue must deal with Sequential Liability You ve all been successful, but additional improvement expected in 2010! How will you do it? 3

4 Introduction Today s Objectives Challenge your current thinking and practice. How are you going to improve? Convince you to consider strategy (and tactics) proven effective in difficult AR management environments in other industries with challenging customers (hospitals, distributors, construction trade) Share experience in improving AR management for over 100 companies in a wide range of industries Ask yourself: would these tactics work at my company? 4

5 Bottom Line Objectives Objective of AR Management Convert orders to cash as quickly and efficiently as possible Ensure an uninterrupted flow of services to your customers Do it all at least cost Benefits of Effective AR Management Reduced interest expense from increased cash flow Reduced revenue leakage/concessions on disputed invoices, lower make good expense Lower cost of collection function Lower bad debt expense Enhanced customer service increased revenue AR Management can deliver huge cash and profit improvements 5

6 Strategy the Three Levels Corporate strategy for receivables Financing customers as competitive advantage Maximize cash flow Minimize bad debt Least cost to manage Undefined A Shared Corporate Vision for Receivables Payment expected on due date Disputes are customer satisfaction issues first, AR issues second Vision shared by C level management, Sales, et al; not just Credit as a voice in the wilderness. Strategic alignment required to optimize the huge investment in AR 6

7 Strategy the Three Levels Portfolio Strategy Different approach for different customer categories, just like a Marketing segmentation approach Agencies vs. Direct Advertisers Major account vs. small account Line of business subscription vs. advertising revenue Government vs. private sector Credit risk rating Allocate staff resources to each segment - # and skill set Align metrics where prudent One size does not fit all 7

8 COLLECTION INTENSITY MATRIX % of # of Level A/R Accts A 70% 559 (>$50K) Proactive Calls Frequent Calling Periodic Meetings Escalate B 19% 705 ($20-50K) Proactive Calls on Large Invoices Collection letters series Collection Calls Escalate Collection Calls C 11% 2278 (<$20K) Escalate Credit Hold Invoice Date Due Date Due Date +30 Due Date +60 8

9 Quote to Cash Process Billing Customer Setup Credit Risk Support Quote, Contract & Order management Billing Collections Dispute Management Cash Applications Red zone functions have a huge impact on Receivables Management results. There is a strong dependency on the upstream operations. Billing Accuracy (accurate invoice with required information or attachments) is single most critical upstream determinant of collections effectiveness & efficiency. A scientific end-to-end approach to improving the entire QTC process (such as Smart Enterprise Process) can yield huge improvements in Revenue Dilution, Cash Flow, and Cost. Examples of errors that impact AR Management: 1. Customer Setup wrong bill to address, tax information 2. Credit Risk poor credit decision 3. Quote, Contract, Order wrong order fulfillment, inaccurate price, terms 4. Billing inaccurate invoice, missing information 5. Cash Applications misapplied or unapplied cash 9

10 Quote to Cash Discrepancy Analysis Quote Customer PO Acknowledg ement Invoice Overview: Analyzed 10 Orders to check data discrepancy 60% Documents used: Quote, Customer PO, SO Acknowledgement, Invoice (Field Used: Quantity, Price, Ancillary, Sales Tax, Line Level Charge, Payment Terms, Customer PO#) Positives: 30% Orders No Discrepancy Few Pricing Issues Customer PO Accuracy No Quantity difference Challenges: 60% Discrepancy in Payment Terms 20% Discrepancy in Ancillary Charges 10% Discrepancy in Sales Tax 10% Discrepancy In Pricing Discrepancy rate 30% 60% Terms of Payment 20% Ancillary Charges 10% Sales Tax 10% Pricing Data Inaccuracy at Various Levels from Quote to Cash 10

11 Field Tested Tactics Key account approach Premium customer financial service Maintain account in good standing to ensure uninterrupted flow of services Proactive collection reminders drive cash flow Skipped invoice, dispute resolution Account maintenance ( clutter ) Face to face meetings Relationship hierarchy escalation protocol Payer profile 10-20% of customers who generate 80% of revenue deserve greater proportion of time and skilled staff 11

12 Key Account Approach N a tio n a l A c c o u n t I m p a c t o n B u s in e s s % 9 0 % 9 0 % 8 0 % 7 0 % 6 0 % 6 2 % 7 0 % 5 0 % 5 1 % 4 0 % 3 4 % 3 0 % 2 0 % 1 6 % 1 8 % 1 0 % 0 % % o f R e v e n u e % o f I n v o ic e s % o f A R > 6 0 d a y s p a s t d u e % o f A R > 9 0 d a y s p a s t d u e % o f o p e n tra n s a c tio n s % o f I n v o ic e s w ith A tta c h m e n ts % o f o p e n D e d u c tio n s Key accounts can also create disproportionate problems if not managed properly 12

13 Field Tested Tactics Lower value accounts Well defined collection timeline (treatment) Low volume contact per account, but high volume in total Later contact to allow for self pay Automatic and Automated Lower frequency billing Incentives for credit/procurement card payment, direct debit Policy mandates for accelerated, secure payment based on volume or delinquency High volume, fast, standard approach required 13

14 Field Tested Tactics Metrics Actual DSO vs. Best Possible DSO Past due amount (1-30 vs ) and %, especially > 90 Credit risk rating of asset Clutter or dilution Actual cash collected vs. target Billing accuracy Misapplied & unapplied cash Incentives can be tricky but are powerful Based on actual vs. target cash collected Quarterly measurement and payout Meaningful amount (15% of base) Accountability and incentives for the right metrics will enable staff to drive results 14

15 Field Tested Tactics Dispute Management Cross functional, shared responsibility Clearly defined workflow, roles & responsibilities Standard resolution timeframes Categorize by type price, retro adj., etc. Route to person best positioned to resolve Track through to clearing internal dunning Automate workflow, document images, reporting Metrics: #, age, value by responsible party and in total throughput ultimate outcome collected or credited by type = causal analysis Dispute management is critical to AR and customer satisfaction success 15

16 Dispute Management Cycle Times Illustration of Dispute Resolution Improvement Days from Inv. Date to Clearing January March June September Past due >90 decreased 48%, Customer Sat. Improved 16

17 Field Tested Tactics Continuous Improvement of Billing Accuracy Measure it Billing Quality Index Utilize dispute data to direct efforts Redesign upstream processes Lean, Six Sigma (cross functional) Ensure invoice format is helping, not hurting Billing accuracy is the Holy Grail of AR management 17

18 Field Tested Tactics Technology Automate repetitive functions in: Cash application: auto-cash utilizing lockbox-provided payment data file digitized images of payments & remits Collection: prioritization of work per your defined strategies workflows to route & track disputes to resolvers contact auto dial, auto fax, auto dunning letters PTP auto diary follow up, checking payment receipt first Credit: auto vetting & scoring Billing Electronic Invoice Presentment & Payment (EIPP) with customer activated payment & dispute capability and direct debit Document digitization, retrieval, and routing electronic images Reporting Technology is absolutely required to achieve peak effectiveness and efficiency 18

19 Case Studies: Disasters The costs can be hidden and devastating: Cash drain increased investment in receivables asset for what return? Example: $2 billion manufacturer saw receivables increase $110 million in nine months with only modest revenue growth Bad debt expense a dollar for dollar reduction of profit Example: a jet engine repair firm which dealt mainly with government, lost $1.1 million by failing to secure letter of credit from private sector customer in Egypt. Example: a large services company that had large, blue chip clients and no credit controls, lost millions when Kmart, US Airways, etc. filed bankruptcy. Example: a $3 billion distributor lost 33% or $16 million of an acquired firm s receivables through poor integration execution. 19

20 Case Studies: Disasters Concessions invalid disputes and deductions written off because of age, not merit. May be hidden in charges to bad debt reserve, discounts, returns, & allowances, or other expense category Example: $400 million distributor with a 6% gross margin, lost over $1 million annually from concessions. Example: $350 million food manufacturer lost over $2 million in invalid deductions from delay in challenging them. Misapplied Cash and cost Example: $200 million apparel firm misapplied cash. Angry customers stopped paying until their accounts were corrected. Result: low cash receipts, high temp help expense for seven months. 20

21 Case Studies: Successes Examples: Generated $66 million of cash from receivables for a $1 billion Mid-Atlantic medical device manufacturer, reducing DSO from 63 to 41. Reduced DSO from 120 to 90 in three months for a New England disease management company. Client s DSO is now in the 40 s. Reduced delinquency by 43% in three months for a $130 million East Coast medical equipment manufacturer, generating $5 million of cash. Recovered from bad debt over $300,000 of over-one-year-old receivables for a $12 million Southwestern home health care provider. Increased cash receipts for a West Coast orthotics manufacturer by $11 million in three months. 21

22 CASH FLOW ENTERPRISES DSO Days Jan. Feb. March April May June July Aug. Sept. Oct. Nov. Dec. Time Period 22

23 Conclusions New or different actions required to get better Strategy Define and align Everyone on board Portfolio segment, targeted approach, align resources, execute Tactics Metrics and incentives Dispute resolution workflow, imaging, automation Billing accuracy Technology Good luck!! 23

24 Questions Your questions now I ll be happy to answer questions throughout the day or after the conference via 24

25 Thank You John G. Salek Confidential. All trademarks appearing herein belong to their respective owners. 25