Reduce Your DSO with Accounts Receivable Automation
Today’s changing CFO role is made more difficult when manual and paper-based processes still dominate the organization. Automation can help re-write the script to make both the CFO and the company successful. There are numerous (more likely, innumerable) articles that are written on how e-invoicing helps accounts payable. But that leaves out a full one-half of the continuum…accounts receivable. It’s absolutely essential to remember that B2B transactions, just like B2C transactions, are between two essential parties…buyer and seller. So it’s important to realize how AR automation and e-invoicing have transformed this most valuable function from a clerical process into a strategic asset, allowing suppliers to realize benefits in what turns out to be a win-win situation.
Sponsored by Corcentric, a new CFO e-book, “The CFO’s Guide to Automating Accounts Receivable,” details how this transformation is taking effect. Among all of the goals that CFOs work towards, managing cash flow and working capital tops the list. Receiving payments in a timely manner is certainly a valuable step in that direction; but it’s also vital that finance executives have full visibility into the status of all their outstanding invoices in order to make informed decisions. With this information in hand, it will likely be possible to reduce days sales outstanding (DSO) which, according to a 2015 IOFM AR Automation study cited in the e-book, is a top priority and a top measurement of performance.
How does AR automation help reduce DSO? Manual, paper-based processes are inherently inefficient, prone to human error and more time-consuming than automated processes. Consider the time necessary to process paper check payments. Such inefficient processes too often lead to exceptions and exceptions can take weeks to settle, driving up the DSO. The IOFM study cited in the e-book found that relying on paper-based receivables can result in an exception rate ranging from 5 percent to 20 percent based on the industry and receivables complexity; however, best-in-class companies who have implemented automation and e-receivables have an impressively low rate of exceptions, from 1 percent to 2 percent. When a shorted amount is at a level where it’s considered less costly to write it off than it is to fulfill through the reconciliation process, the cost to the company overall can be significant. The IOFM study found that 21 percent of companies in the study lose at least $250,000 annually due to this unfortunate choice.
Manual misses out on data. As I indicated earlier, AR automation solutions and e-invoicing provide visibility into payment status, which will enable CFOs to manage cash and working capital with greater accuracy. But knowledge goes beyond this information alone. Many solutions also provide a robust data and analytics component that can track customer purchasing and payment patterns, providing executives with the necessary data to make informed decisions with less risk.
The risk is even greater for decentralized organizations. For companies that sell their products through distributors or dealerships, relying on manual, paper-based receivables is even riskier. Decentralization precludes the accuracy necessary to know that customers are paying the correct amount regardless of where they make their purchase and that they have paid in a timely manner. It also means that dealers and distributors who may have tighter revenues are often forced to chase down those payments due rather than using that valuable time to build up their (and subsequently, the manufacturer’s) business.
The best solutions are flexible. The one adage every supplier knows is “the customer is always right.” So the e-book recommends that suppliers looking for an AR and e-invoicing solution provider try to find one that can work well for the buyer as well as for the seller, including the ability to deliver invoices in the format most efficient for each customer. As businesses move more and more towards end-to-end electronic transactions, it’s also essential that the provider you choose offers a portal that both buyer and seller can access 24/7 for real-time visibility into all payments status. Most providers now offer cloud-based solutions which alleviate the need for capital investment in hardware and software, require minimal involvement with internal IT, and are user-friendly and easy to train as users come and go. Automation is changing the AR landscape for the better; CFOs that don’t want to be left behind should seek out the end-to-end electronic solution that serves them, and their customers, best.
To learn more, download the full Corcentric/CFO e-book.