Process improvement in financial management means spotting resource leaks that you don’t see when working on a day-to-day basis. In the area of accounts receivable (AR) management, revenue leakage can take the form of unnecessary overhead costs, toleration of late customer payments, weak recovery of faulty deductions, or write-off levels that have crept too high.
You could bust into the walls, so to speak, and go searching for money leaks. Better to start with measuring the overall AR process cost. Chances are, if you’re spending too much, there are a number of problems hiding from plain view.
This month’s metric looks at a big chunk of the overall cost of AR. The data reflects the cost of invoicing, rendered in terms of the cost per invoice incurred by 190 companies based in the Americas. The focus here is the process of generating and delivering customer invoices. It includes creating methods and procedures for communicating and delivering invoices and statements for services and products.
The process encompasses the maintenance of customer/product master files, the generation and transmittal of customer billing data to the customer, the posting of receivable entries, and the resolution of customer billing inquiries. It does not include receiving payments. This data comes from APQC, the nonprofit business benchmarking and research firm I work for.
The top performers, the top quartile of the total data set, spend $0.71 or less per invoice. The weakest performers, those in the bottom quartile, spend $11.50 or more per invoice. The median figure, which is the middle point in the range of data captured, indicates $3.17.
If CFOs finds their cost per invoice in or near the bottom quartile, the potential savings gained from strengthening the process and moving above the median could prove very appealing. Beyond the money pocketed, a sustainable process repair could deliver benefits such as stronger protections from fraud, better cash-flow predictability, and happier customer service reps. Another possibility is happier customers. How so?
Consider the case of a national freight trucking company. Before it streamlined and automated its AR process, some customers would learn to their chagrin that the company’s system marked them as late in paying their bills. Their accounts were frozen and they couldn’t place new orders. Most weren’t late at all; the trucking firm had simply been swamped by its own growth and would at times fall behind in processing and posting payment transaction data.
This was a strategic issue because the business runs on very short order-to-cash cycles and operates in an atmosphere of cut-throat competition. Customer satisfaction is a key driver of growth. Before implementing its automation solution, the trucker had been relying on a small team of people working furiously every day—sometimes on weekends—to manually process a mountain of remittance data.
Managers did not want to increase staff size to try to muscle through the expected growth trajectory. The remedy involved process automation, and since then AR staff productivity shot up. The staff, reduced to two from eight people, can process 2,000 remittances per hour on a peak day, versus 400 previously. About 80% of transactions go automatically through the system.
Where to Start?
Improving AR can help a company attain efficiency and effectiveness goals. But it shouldn’t be done in a vacuum. The first step is to benchmark current performance against similar companies of the same size and/or industry. Then determine how far away you are from the cost-reduction goal. With that information at hand, the CFO can initiate rich team discussions to pinpoint how and where the current process model is leaking time, money, and brain cells.
Get key managers in a room, map out the entire AR process — or, even better, the whole order-to-cash process — and look for paper bottlenecks and other constraints on throughput. Identify where “upstream” practices in, say, sales order management or service delivery cause problems for finance. Dig into trouble spots and sort out the assumptions and logic behind process steps. Take a close look at organizational structure: who does what, in what location, when? Each CFO will need to ask questions that fit his or her business situation. The essential point is to clarify if there’s a better and cheaper way to get work done.
Mary C. Driscoll is a senior research fellow in financial management at APQC, a nonprofit business benchmarking and research firm based in Houston.