Do you want to gain full control of incoming and outgoing cash flows, unleash hidden reservoirs, and improve the performance of all your cash-related processes? With a solid CFO Playbook you can build your strategy to achieve an order to cash and procure to pay cycle that are operate symbiotically. Step up your game and achieve optimal cash supply and sufficient liquidity at all times.
To ensure business continuity is times of tightening liquidity it is important to leverage internal funding sources, identify and access all hidden cash, and build a well-functioning working capital management. This means you have to bring the cash-in and cash-out value streams together and view them as two sides of the same coin – one global cash flow process. On the cash-in side we have all the processes generally subsumed under the term order to cash, consisting of credit management, cash application, collections, and dispute resolution. The central KPI in accounts receivables is days sales outstanding (DSO), which is the duration it takes until your customers pay your invoices. On the cash-out side we have supplier management, accounts payable, and payment management. Performance here is usually measured against the amount of days payables outstanding (DPO) – the time it takes from invoice receipt to payment. For an optimal liquidity position and overarching cash clarity, you should aim to achieve an equilibrium between DSO und DPO.
The ideal DSO and DPO, is at any organization’s discretion. Some want the DSO to be as short as possible, while extending DPO as much as they can, so they can keep cash on hand for a longer period of time. Others chose to pay vendor invoices quickly to leverage discounts granted for early payers. However, one thing is for sure: to achieve the desired equilibrium and performance for your O2C and P2P value streams, you have to overcome silos in your finance organization. You must encourage a cross-department team spirit and understand how the actions of one team will affect the other. To get all of your team members on the playing field together and win the cash control game you need a targeted offense and a strong defense.
Go on the Offense: Take Control of Your DSO and DPO Drivers
Don’t wait. Take control of your cash by proactively improving processes and taking decisive action wherever possible. Aim for a targeted collections management to get cash in quickly, reduce DSO and improve liquidity. Make sure your players have everything they need to succeed in the field – after all collections is a complex and demanding game that needs a nuanced approach for every individual customer. By implementing best practice collection strategies and templates with intelligent automation, your collections team will have the tools they need to successfully bring down your DSO.
Another thing you can do to improve your DSO is to speed up your cash application by ensuring your customer payments are matched to open posts right away. Faster cash application means you can access your funds as soon as possible. How? By running an automated and high-speed customer payment capture and matching machine that combines human-defined rules with artificial intelligence to create a cognitive cash application process. Finally, improve your customer payment experience with intuitive and easy to use payment procedures. This will not only result in faster payments and improved liquidity, it will also enhance your customer’s experience.
To improve your DPO offense, consider combining automation rules with guided human oversight for faster, more accurate processing. Lift and shift work across locations and shared services centers to ensure invoices are paid exactly when you want them to, even in times of crisis. Pay strategic suppliers quickly to keep supply chains strong, while negotiating favorable pricing and discounts from suppliers in exchange for early payment. Optimize the capture, validation, and processing of invoices with electronic information capture and intelligently automated exception handling and approval procedures with your accounts payable. And finally, build efficient and cost-effective payment processes and bank communications to keep transaction costs to a minimum.
Build a Strong Defense with a Solid Risk and Security Infrastructure
Implement safeguards and control mechanisms into your AR and AP processes to avoid cash loss at any point. Start with powerful credit controlling to protect the business from customer-related default risks, resulting in excessive DSO and even write-offs. You can do this by setting up an effective and automated credit risk determination and limit approval processes. This will ensure sales continuity while also containing risk. At the same time, you should implement a customer-oriented and professional dispute management process to ensure continued customer satisfaction. To achieve this, create a single source of truth for data and documents and standardized and fast procedures for quick response and conflict resolution.
On the DPO side, the most important measure to protect your business is total spend control. Pay all invoices in a timely manner, prioritizing payments according to business needs and delaying payment where possible or necessary to improve your working capital. Make sure you capture all available discounts, as this can result in significant cash savings. Also, request discounts from suppliers in times of crisis based on spend history. If you need to onboard new customers, avoid risk and obtain the best possible conditions and information during onboarding process by implementing a standardized supplier evaluation, including scoring, compliance control and self-service portals. You should also find a way to automatically validate invoices so you can detect and reject duplicates or invoices with incorrect information as soon as possible to avoid unnecessary work.
With regard to payment management, it makes sense to centralize payment processing to improve controls and manage payment formats, payment methods, and bank connections faster and more accurately. Build towards a best practice payment management to provide global transparency into all payments, accounts and transactions. Optimize bank connectivity and enable frictionless payment processing where feasible. And finally, strengthen your defense by protecting your cash against any fraud attempts during the payment process that could result in loss of cash. You can achieve this with a sensitive and highly-automated fraud screening and detection system that can recognize any anomalies during the payment process and secure you cash. Also, make sure you analyze supplier spend so you can ensure fair business practices and prevent collusion, fraud, or even embezzlement.
Build a Game Plan for Groupwide DSO and DPO Optimization
Achieving equilibrium between DSO and DPO should be a top priority in your corporate strategy for finance. To help you navigate these complex decisions and transformation processes, Serrala has developed a CFO Playbook. This set of interactive virtual events and vast library of assets will provide CFOs – and their finance organization – with the guidance they need to achieve best-in-class cash visibility and finance process efficiency. It includes expert advice and real-world customer scenarios so you can build a game plan to position your company to win in the current and to restart for the post crises economy. Discover our CFO Playbook and how to ensure liquidity for the organization today.
Learn more about Optimizing DSO & DPO here.