Addressing AR Concerns Through Technology
By Andrew Baxter, Ralph Loggia and Alisha Jernacke
Entrepreneurs tend to view growth as the most vital indicator of
performance. However, many fast growing companies overlook
the fact that what may be even more challenging than little
or no growth is facing a cash crunch during a sales increase.
An efficient Accounts Receivable (AR) management system is
imperative for generating timely and adequate cash flows which
have the potential to make or break a business. Timely and
accurate billings maintain vital cash flows that are needed to
pay vendors, employees, bills, and most importantly allow businesses
to take advantage of new opportunities as they arise. An
informal system can function when a business is small, however
with growth; it becomes necessary to rely on a formal and/or
Companies often find it difficult to push their clients to pay-up. Automated systems reduce these difficulties while streamlining collections. Accuracy in numbers and billing systems are also improved as a direct result. The ability to generate invoices to include a logo is embedded in these systems contributing to a professional impression. Clients prefer to be billed timely and on a consistent schedule.
Fast growing companies often complain about the amount of time it takes for their clients to pay. However, many businesses focusing on growth fail to optimize their working capital as a source of liquidity. Symptoms of AR underperformance are:
• High overall Days Sales Outstanding (DSO)
• Increased per invoice processing costs
• Clerical errors in invoice processing
• Invoice reporting and status update errors
• Customer dissatisfaction
Heavy dependence on paper and manual processes is a major contributor to the underperformance of AR systems. Usage of plugs like Excel, Word, and Outlook often create inefficiencies. According to a study by the Institute of Financial Operations, about 60 percent of invoices are printed and most Business-to-Business (B2B) payments are made by paper checks. A report by Harvey Spencer Associates, Inc. states that businesses worldwide spend about $30 billion annually in capturing information. Heavy usage of paper also contributes to making collections a tedious and time consuming process.
A study conducted by Rocket Lawyer (an online technology firm), suggests that one in four companies have trouble collecting payments from customers; over 43 percent have bills that are over 90 days overdue, while only 28 percent send reminder notices. This situation can be risky for cash strapped fast growing companies.
Manual processing issues
• Time consumption and expense
• Error-prone, less control and visibility leading to invoice approval delays, late payment fees, and missed discounts.
• Delays in both month-end and year-end closing
• Invoice reporting and status update errors
• Numerous clerical hours consumed to manually reconcile, research, and resolve invoice issues and exceptions rather than focus on strategic Accounts Payable (AP) tasks.
Fast growing companies find it challenging to engage employees to this process, when their time is better utilized when applied to other functions within the company. The solution is automation of these processes by using Revenue Cycle Management (RCM) solutions.
Myths about automation
While business managers understand and appreciate RCM, there are many misconceptions. A white paper by Anytime Collect titled, “7 Fears of Accounts Receivable Management Automation Put to Rest” reveals some of these as:
• Drastic change; will take away control of the process
• Cloud based automation is not secure
• Difficult to use and implement
Managers are able to understand the value of automation with a little research.
Cost of Automation
It is a common belief that RCMs are too expensive. However, most good entry level systems are available for subscription as hosted solutions for $100 or less, suitable for companies managing about 100 customers or 100 invoices monthly. These services are scalable with growth. As sales grow from $10 to $500 million, subscription costs increase between $100 to $300 million and $1,000 to $3,000 million for perpetual license purchase. Automation benefits
• Increased Efficiencies: Intelligent information capture, visible & editable user invoicing platform, no IT involvement after installation and workflow management (software queues up invoices prioritizing on savings opportunities or other qualifications) ensuring fewer errors, leading to greater efficiencies.
• Cost savings: Electronic invoices typically cost less than $2, as compared to the $2 to $10 range of paper invoices, saving much needed cash.
• Ability to Capture Discounts: Dynamic Discount Management system enables real time discount capture and is one of the greatest benefits of RCM. Dynamic Discounting works between a buyer and supplier by using discounts as incentives for early payment. In departments using paper based processing; many discounts are lost due to lengthy processing times.
• Accuracy: Clerical errors are the biggest cause for invoice disputes. RCMs and electronic invoicing cut down these errors, reducing the amount of time spent on correcting them, thus saving cost and improving DSO and cash flow.
• Greater Control: RCMs provide greater transparency of payments and receipts, resulting in increased control of finances and faster year and month-end closures. It also helps in providing current information enabling businesses to negotiate/update contract terms, discounts, etc.
• Quicker Turnaround Time: Invoices arrive, are routed correctly, and get approved quickly. According to research and consulting firm PayStream Advisors’, “Reaping the reward of AR Automation”; the end-to-end working capital cycle can be improved by as much as 11 days. For fast growing companies, this means faster cash realization, which can be used to pay vendors and employees.
Companies have witnessed reduction of DSOs by about 10 to 20 percent, 15 to 25 percent; in bad debt reserves and up to 25 percent in past dues receivables through the use of RCMs. For a high growth company, an automated system that is easily expanded on is essential. This capability assists with working cycle capital management while supplying cash flow that is essential for business operations.