Wanted: Working Capital - The Invoice-to-Cash Challenge
Eva van der Grijn
11-07-2022 7 mins read
How optimizing invoice-to-cash processes helps you find elusive cash
Working capital tends to be elusive and is often difficult to identify where it is hiding. As a CFO, you need sound data and KPIs to allocate working capital and plan liquidity needs in the best possible way. But, do you also spend 80% of your time on menial tasks, such as collecting accounts receivable data from different teams and systems, and therefore lack transparency over available cash? Hardly surprising then that manual data collection and complex finance processes were named the top two challenges by finance leaders in our recent survey.
The problem with that? You can’t manage what you don‘t measure. Complex processes and manual cash chases cost you time and money. Literally. Because of inefficient and broken processes along the invoice-to-cash cycle, 1/3 of valuable working capital is usually tied up in accounts receivable. And, instead of real-time data, you often only get a rear-view mirror outlook of cash-flow if processes like cash posting are delayed by 2-3 days.
So, how do you bring light to your invoice-to-cash data and track down the hidden liquidity?
Analyzing the key pain points across the inbound payments processes should come first. Once you know the pitfalls in the different steps across your invoice-to-cash cycle, investigate strategies and I2C applications to enhance the key components of the invoice-to-cash cycle including:
- Credit & risk management
- Collections & disputes
- Cash application.
Thirdly, decide how you want to start improving your cash flow management. Whether you want to optimize the components step-by-step or integrate and enhance the entire invoice-to-cash process in one go, you must determine your priorities and capacities.
But first things first.
KPIs to look out for when enhancing inbound payments processes
“If cash is king, data is the queen.”
Let’s start with the overall efficiency of the accounts receivable process. What does your data tell you about the whereabouts of your working capital?
Credit and risk management
How creditworthy are your customers? What does their payment behavior look like? Are your payment terms ideal or maybe too lenient towards your customers? Risk mitigation is better than bad debt. Therefore, to answer questions like these, you need full transparency across all customer-related information. Both from external parties, such as credit agencies and insurers, and internal data, like DSO, payment terms, or credit limits.
Only a 360° view allows you to see the whole picture and drill down into the details of industries, regions, or even individual customers, to connect the dots. When a customer account shows, for example, a DSO of 122, this might seem like a lot. If the payment terms for this particular customer, however, allow him 120 days to pay his bills, the DSO of that customer is rather good. To be able to put this data into perspective and draw the right conclusions, you must have full and real-time visibility into several key performance indicators.
Collections and disputes
Do your customers have a habit of paying late? Have they raised any disputes over the invoice amount, or have they paid you, but deducted an amount from the total? Closely monitoring such indicators is important to adapting your collections strategies. For example, you could incentivize them to pay with early payment discounts to keep your customers happy and your cash coming in at the same time.
But, you also need to check how much it actually costs you to offer your customers such discounts. Is it worth it or is the price too high? Would it be better to offer your customer at risk a payment plan ? Whatever helps to ensure your inbound payments keep coming in, you need data on how effective the targeted collection strategies are or if they cost too much for what you receive.
How much have your open items aged? How effective are your cash application processes? Manual processes often delay the cash posting significantly, which has a major impact on the cash flow management and your treasurer has to make decisions on the incomplete or late data. Automating the process to the max is therefore highly important – as is keeping an eye out that the automatic matching is still up-to-speed. Automation rate over time, automated matching rate by dimension (such as bank/company code/business partner/account type), percentage of open items matched, cash flow balances, and other key figures give you valuable insights into the efficiency of your inbound payments processes.
We have seen how important data is and which KPIs to look out for in particular. But, how do you get them? You surely don’t have the time to manually collect such data and chase your working capital.
Tackling AR inefficiencies with end-to-end I2C applications
Only 12% of finance professionals say that their order-to-cash processes are highly synchronized and seamlessly integrated from end-to-end, according to a CRF survey. At the same time, automation is important or very important for 98% of the CRF respondents.
Complex and fragmented systems for the invoice-to-cash processes are the rule rather than the exception. This keeps CFOs from obtaining high-quality data for their working capital allocation and liquidity planning.
“As a CFO, you must have the guts to map out a bold path for digitization that fully considers where your data intersects and where your processes integrate. If you do not, you will end up working tirelessly to connect the dots between your digital and manual processes and you will achieve only a fraction of the benefits you could have achieved with fully integrated data and processes.”
Axel Rebien, CFO, Serrala
Integrated I2C applications are the key to breaking silos and enhancing efficiency and cash visibility for the entire I2C cycle. Solutions from one source or vendor are ideal to build a seamless end-to-end process that is highly automated. They allow you to work in one and the same system environment , enabling the standardization and automation of all processes. That way, you don’t have to familiarize yourself with multiple systems, helping to keep training efforts at a minimum, ensuring the same quality, and harmonizing processes across the finance organization of your business. With such instruments in place, you are best equipped for hunting down your working capital.
Implementing a digitized invoice-to-cash process – Big bang or phased approach?
The simple answer to that is: It depends. It depends on the investment you are willing to make, on your goals, and your own resources and capacities for such a project.
If you go for a big bang, all implementation efforts will be concentrated at once, which ensures that the entire O2C organization is onboarded at the same time. It takes an intensive effort but shortens the overall implementation timeline. You benefit from the fastest return on investment and highly efficient invoice-to-cash processes from day one.
A phased approach, on the other hand, lets you focus your attention on the core processes and your biggest pain points. The impact of such an approach is lower than with a big bang approach, but also takes some pressure off the finance organization. By being able to increase the efficiency in one part of the invoice-to-cash cycle, you can free up resources and integrate any lessons learned from the first phase into the next steps.
Both approaches have their merits.
Conclusion – Ready for the bounty hunt
Working capital allocation and liquidity planning need good data – and you are only going to get those with seamless, automated end-to-end processes for your finance team. Integrating and digitizing the entire invoice-to-cash cycle, therefore, makes total sense. It saves time, improves process flows, and delivers better data faster for cash-flow management. And the good thing is: you don’t have to do it in a big-bang project. Take it step-by-step and start where your biggest pain points are.
If you would like to find out how to turn your invoice-to-cash process into a smooth, automated end-to-end process, explore our effective solutions. We are happy to provide you with insights into benefits, key features, and how other organizations have achieved major results with them. Use the contact form to request a demo.