Blog | June 14, 2016 | by Kate Freer

How Automation Can Reduce DSO in the O2C Cycle

 How Automation Can Reduce DSO in the O2C Cycle A new IOFM white paper details how automation can transform the order-to-cash cycle for those in a closed-loop network. Businesses have always needed to manage their cash flow. In this competitive, global, and constantly changing economic reality, that need has gotten even greater. Reducing complexity and friction in the process of turning orders into invoices into cash received is an essential step on the road to success. What stands in the way of achieving these goals is a reliance on paper and manual processes.

The Institute of Finance & Management (IOFM) has just published a white paper, “How Closed Loop Commerce Networks Transform the Order-to-Cash Cycle,” sponsored by Corcentric, which looks at this issue from the vantage point of businesses that operate with a network of distributors, dealers, or resellers, as well as Group Purchasing Organizations (GPOs). The paper makes clear that these kinds of businesses and groups can leverage automated closed-loop B2B commerce networks to resolve their issues and answer four specific challenges.

Challenge #1 – Inefficient processes due, in part, to the fact that nearly 50 percent of businesses still use spreadsheets to reconcile their AR or the fact that nearly half of large corporations still receive B2B payments as checks, the reality is that paper is still a major factor in process slowdown.

Solution #1 – Improved efficiency as a result of digitizing the exchange of documents across networks. Data is then normalized allowing a single invoice to be transmitted to the buyer. Plus, three-way matching that reduces invoice cycle time and e-payments that ensure contract and price compliance streamline the entire O2C process.

Challenge #2 – High operational cost. A PayStream Advisor report found that “businesses that process paper-based invoices experience costs over 150 percent higher than those that utilize electronic invoicing. Plus, processing costs are more than six times higher for paper checks vs. e-payments. This cost becomes even higher for GPOs and network-based businesses.

Solution #2 – Reduced costs. The closed-loop network that IOFM refers to in this paper centralizes all billing by automatically aggregating all sales under a national account or GPO member on a single electronic invoice. This consolidation reduces the amount of time and cost used by FTEs to send out multiple invoices and reconcile multiple payments.

Challenge #3 – Poor cash flow. Cash flow and managing working capital have never been more vital to a company’s well-being. Reducing Days Sales Outstanding (DSO) is the goal; almost one-third of businesses in the IOFM survey indicated that DSO is one their most important metrics.

Solution #3 – Accelerated cash flow. A robust closed-loop network solution would also include a channel finance component. This would enable sellers to receive payment from the channel finance provider in a much shorter cycle rather than waiting for payment directly from the buyer. The channel finance provider would accept the responsibility of collecting the payment from the buyer.

Challenge #4 – Lack of visibility. You can’t control, manage, or improve what you cannot see. How do you manage your cash flow if you don’t have real-time knowledge as to the status of every invoice? Almost one-third of businesses surveyed by the Institute of Financial Operations (IFO) in 2014 said that improving that visibility was the top driver for implementing AR automation.

Solution #4 – Enhanced visibility. Closed loop commerce networks provide not only real-time visibility into invoice status; they also provide visibility into the transactional data needed to accurately forecast cash flow and make strategic decisions based on predictive analytics. Sellers can discover what, when, and in what quantities customers are buying their product. Plus businesses also can recognize trends that enable them to pivot to capture potentially new markets.

There’s no question that automating the O2C cycle can help most businesses, but the IOFM paper focused on those types of businesses where the benefits are even greater. Download the full paper.