A Guide to Optimizing Cash Flow & Improving the Order To Cash Cycle

by | Jul 9, 2021 | 0 comments

Managing cash flow can be challenging even during the best of times for many businesses. The COVID-19 pandemic has added several layers of complexity in terms of managing cash flow. While timely strategies on inventory management and cost-cutting help, available data shows money often gets tied up in accounts receivables. Prioritizing accounts receivables (AR) management is the key to optimizing cash flow.

As change agents, Chief Financial Officers play a crucial role in helping their firms navigate the ongoing economic challenges. By investing in the automation of AR, CFOs can help their firms optimize working capital and stay future-ready.

What are accounts receivables?

Simply put, accounts receivable is the money that is due, and as yet unreceived by a business from its customers. Also known as bills receivable or trade receivables, accounts receivables denote that the business has extended credit to its customers for the services or products sold. The business is entitled to receive the amount in the defined timeframe.

For instance, Max Agency sold goods to National Traders on the 2nd of June, 2020 with the goods being worth $80,000. Max Agency offered a credit period of 20 days. From the 2nd of June till the time National Traders pays the bill, $80,000 is considered to be accounts receivables.

The amount yet to be received from customers is reflected in the ‘current asset’ column in the balance sheet.

The Accounts Receivable process

While each business has its own accounts receivables process, most companies adopt these key steps:

  • Establishing credit practices
  • Invoicing customers according to the credit policy
  • Capturing due date for payments
  • Setting up a collection schedule
  • Sending reminders for pending bills
  • Tracking received payment
  • Adjusting the receivables after receiving payment

How do accounts receivables impact working capital?

Net Working Capital or NWC of a company is the difference between its current assets (accounts receivables, inventory, and cash) and its current liabilities (accounts payable). The working capital is a measure of a business’s liquidity, financial health, and operational efficiency. A positive and sustainable working capital enables the company to improve liquidity, expand its operations, fund current operations and maintain profitability. Positive cash flow also ensures the company is able to respond to and navigate through challenging economic conditions.

PwC’s global analysis shows that while working capital is the key value driver, $1.4 Trillion is tied up in balance sheets.

Historically, companies have focused on the three strategic components of the working capital to improve liquidity. These include inventory management, cost-cutting, and lengthening accounts payable processes. However, accounts receivables (AR), typically the largest component on the balance sheet, has been viewed as an administrative concern rather than a strategic priority.

Recent data shows that accounts receivables are the key area where money becomes tied up. Delayed payments impact businesses across sectors severely while impacting working capital and cash flow.

  • U.S. businesses are owed $3.1 trillion on any given day in accounts receivables.
  • Businesses lose 51.9 percent of the value of their receivables when the payments are delayed beyond 90 days
  • Firms write off anywhere from 1.5 to 5 percent of AR as bad debt.
  • In 2019, 39 percent of invoices were paid late as against 43 percent in 2018
  • The average value of delayed invoices was $48,542, in 2019.

Late payment severely impacts almost all key sectors including manufacturing, professional services, and retailers. According to a Dun & Bradstreet report from 2020, 10 percent of the aging dollars of 45 industry segments were 90+ days past the due date. Among the top industries getting paid severely late were retail auto and home supplies, publishing, frozen goods, general groceries, manufacturing, medical equipment, and computer programming.

Management of accounts receivables is critical to ensuring a positive workflow capital and liquidity. This entails putting in place a credit management or accounts receivables management system that optimizes AR and enhances cash flow.

Accounts receivable automation is a smart system that helps in building, improving, and sustaining better relationships with customers. The unprecedented challenges posed by recent global events such as the pandemic, political turmoil, and turbulent trade environment, further underscore the importance of an effective credit management system.

However, a recent study from Credit Research Foundation shows that incorrect invoices, delays in sending them, and other administrative problems are behind 61 percent of late payments. Many companies continue to rely on legacy systems or outdated manual processes to manage AR.

  • 69 percent of small businesses rely on spreadsheets to track invoices.
  • A 2020 study shows that almost all financial department professionals input some billing or invoice information manually.

This contributes to disputes, late payments, and errors as per a survey of 300 financial managers. 25 percent of respondents stated manual payment methods were the main invoice-payment method used by customers.

The consequences of poor accounts receivables management extend to multiple areas:

  • Firms that use manual processes spend 30 percent of their time gathering information about customers and manual entries. This leaves them with less time to communicate with customers regarding the payment.
  • Physical invoices are not only time-consuming but are expensive when processed manually.
    • A 2019 study shows it takes up to 6 days on average to process a physical invoice while the per invoice cost ranges from $16 to $22.
  • Poor productivity
  • Efficiency gaps
  • Manual processes resulting in too much time spent in updating spreadsheets, searching for customer data, correcting data errors, among other non-value-adding tasks
  • Missing documents
  • Incorrect address, wrong data, and invoices getting lost
  • Lack of priority on high-risk accounts
  • Outdated or incorrect information

The COVID-19 pandemic has made manual AR processes defunct. While the health crisis has given rise to great uncertainty, it also presents a window of opportunity for CFOs (Chief Financial Officers). Finance professionals are poised to play a critical role in transforming the future of their firms by adopting agile thinking, systems, and processes.

The evolving role of CFOs

An Ernst & Young survey reveals that 86 percent of CFOs agree that they need to focus on protecting enterprise value in the current time while enabling future growth. An equal percentage of CFOs believe they need to balance new mandates along with their traditional responsibilities. 69 percent of finance professionals state they are witnessing a fundamental change in their roles. The need of the hour is to think differently and digitally transform financial functions. Apart from being agile and flexible, CFOs need to find ways to gain deeper insights into their customers who are at the most risk and hold the highest value.

Innovative technologies and automation are emerging as the core components of finance functions. A survey shows that most financial decision-makers expect automation to offer a strong ROI (return on investment) for their firm. B2B automation, according to 84% of respondents, could reduce errors while 81% state it could reduce costs.

Artificial intelligence and automation, according to 72 percent of CEOs surveyed in the UK, will significantly impact the way business is done over the next five years. To optimize the working capital, CEOs and CFOs must focus on harnessing these technologies. Studies show firms that use an automated accounts receivable process spend just 6 percent of their time gathering information while 62 percent of the time is spent communicating with customers.

Accounts receivables automation helps the firm manage AR more effectively, leading to predictable cash flow. Positive working capital empowers firms to plan, grow and invest even during challenging times. Intelligent automation has emerged as the most valuable tool for CFOs to optimize working capital and AR management.

Achieving cash excellence amidst the pandemic will entail establishing a cash-centric culture across people, processes, and structure.

CFOs and CEOs must lead from the top to establish a robust cash culture and making cash a priority. Companies that have a positive cash flow are the ones who regularly communicate the importance of cash to their employees. This needs to be done not only to strengthen resilience during challenging times but also to create value. CFOs of successful companies signal that capital efficiency metrics such as Cash Conversion Cycle and positive Net Working Capital are as important as profit.

In terms of structure, leaders need to establish clear accountabilities and regular cadence. For instance, a family-owned company established a war room that focused on hour-long meetings on a daily basis chaired by their CFO. The war room reviewed daily cash balances while identifying opportunities to improve cash flow rapidly. Within eight weeks, the firm had cash savings while reducing its accounts payables.

A smart and streamlined cash-reporting system that is accessible to relevant stakeholders across the organization is the third critical component that CFOs need to focus on. Digital tools and automated systems can eliminate repetitive tasks involved in AR, making the process efficient and results-driven.

The benefits of automating AR

Automation reduces the number of days required to process invoices to 2.9 days with the per invoice cost being $2.18. For a firm that processes invoices in thousands per day, this translates to huge savings. Not surprisingly, 80 percent of accounting executives state AI offers a competitive advantage while an equal percentage believe it enhances productivity. Depending on the size of the firm, a company can save up to $16 per invoice through automation.

Automation and AI are set to be game-changers when it comes to cash flow management. The possibilities include:

  • Data analytics helps convert information into actionable insight and focused action.
  • Offering immersive visualization of cash flow and its importance across the organization to build awareness.
  • Predictive analytics to optimize the efficiency of AR/payment collection processes.
  • Drone technology to accelerate inventory count and management.
  • Accounts automation to remove manual back-office processes.
  • AI algorithms to flag bad debts and identify high-risk/high-value customers.

The benefits of AR automation are diverse:

Streamlined invoices: Manual processing of invoices entails extracting data and manually entering it in a PDF or Word doc and mailing the customer. The customer then has to review and approve it before making the payment. These tasks are not only tedious but are prone to disorganization and data entry errors that can have serious consequences. With easy integration to XERO and MYOB, AR automation streamlines invoices.

Faster payments: With AR automation, invoices are created accurately while you can send them to the right customer automatically and digitally. Automated reminders can help speed up invoice approvals that help remove lag time in sending invoices.

Automating invoices will ensure the right customer receives them at the right time, eliminating delays. With the automated system handling invoice processing, your teams can focus on communicating with customers. Invoices are immediately available for your customers to review, which helps improve the turnaround time for payments.

Focus on strategic tasks: Automating AR functions frees up resources that can then be channeled towards strategic tasks and higher-level financial tasks.

Save money: Automation helps reduce costs by not only minimizing the time needed for processing an invoice but by removing the need for creating dedicated storage space for paper documents. While the average cost of a manual invoice is $16, automation reduces the cost to $2 per invoice.

Central repository: With a central repository of data, automation of AR tracks, measures and identifies productivity of teams across the firm. Getting accurate data on the productivity of any given year or month helps you plan ahead for the future.

Improved customer experience: An AR Automation Report highlighted that for 31 percent of respondents, the biggest benefit related to fewer customer inquiries on misplaced invoices. With automation taking care of manual tasks, you can optimize the customer experience across multiple touchpoints. This includes transparent communication on pricing, approval and payment timelines, ongoing support, and transaction expectations. By ensuring the invoice and payment process is simple, fast, accurate, and hassle-free, your firm can optimize customer service. This, in turn, helps your customers choose your firm again in the future.

A comprehensive AR automation software integrates seamlessly with your firm’s ERP system and streamlines coordination and workflow. With up-to-date, accurate, and real-time insights on accounts receivable, automation empowers firms to make informed decisions on extending/withholding credit, collecting cash, and optimizing working capital.


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