Billing adjustments are a reality for any business and should be relatively simple to make. However, inefficiencies in your systems, policies, or communication practices can make adjustments take much longer than they need to. A lengthy cycle time for adjustments, in turn, can cause ripple effects for key finance processes such as reporting and forecasting. After looking at cross-industry data on cycle times for adjustments, we’ll provide some strategies for making sure that adjustments don’t transform from a simple task into a driver for enterprise risk.
Adjustments come about for perfectly understandable reasons. In some cases, customers might find that there was a mistake in their billing, or that an order was delivered with defects or missing parts. Other times, sales or an executive might offer a discount to a customer that isn’t communicated to accounts receivable (AR). However they come about, it’s best to resolve adjustments as quickly as possible.
The cycle time to resolve adjustments measures the cycle time in calendar days from identifying an adjustment to fully resolving and reflecting it in the accounting records. APQC finds that the fastest organizations (those at the 25th percentile) can resolve adjustments in seven days or fewer, while the slowest take three weeks or longer to carry out the same task.
Long Cycle Times Mean More Risk
Organizations that take too long to make adjustments face at least four different types of risk, which only grow in likelihood as cycle times increase for this measure:
- Not getting paid (or not getting paid the full amount owed) can lead to cash management challenges for a company — especially if the company has already spent resources to deliver the product to the customer.
- Time is money. Finance teams that take longer to make adjustments won’t have as much time to spend on value-added activities, like producing timely and relevant financial statements.
- Delays can also cause problems for reporting. A financial statement for the September quarterly close with numerous outstanding adjustments will not be a reliable guide to your company’s finances — especially if adjustments don’t come until three weeks later.
- Related, delays can complicate forecasting if FP&A doesn’t hear about adjustments from AR or sales in a timely way. Especially in larger companies, millions of dollars in adjustments that aren’t reported for three weeks or longer can have ripple effects on financial planning, forecasting, and other dependent processes.
Eliminating Adjustment Bottlenecks
A lack of proper documentation and poor communication between key stakeholders are two of the biggest causes of longer cycle times for this measure. It’s important to look across your processes, people, and technology to find and remediate these bottlenecks before they create unnecessary risk for your business.
Documentation is critical for your ability to quickly resolve adjustments. If your sales function offers a discount to a customer — or an executive offers a discount to a client over a working lunch — these agreements need to have concrete documentation behind them. If agreements are merely verbal, it’s going to take some time to investigate and resolve adjustments because signed contracts are going to stand as the official record. Put any agreements to paper and make sure that you have policies for approving adjustments in cases where documentation might be missing.
A lack of transparent and timely communication between your sales and finance teams can easily add delays to the adjustment process. Communication between these parties does not need to happen in real-time, but the longer it takes for sales and AR to talk to each other, the longer adjustments will take — which also means it will take longer for FP&A and decision makers to get reliable financial data for activities like forecasting. Work for open lines of communication between sales, AR, and other major stakeholders so that all parties (including the customer) can get on the same page as soon as possible.
An organization’s technologies and systems also “talk” to each other as data flows from one part of the enterprise to another. An overly complex systems environment can cause challenges for adjustments when (for example) a sales system, inventory system, and AR billing system are all working from different data or data definitions. Not only does standardization become more difficult in these environments, but mistakes become more likely and efficiency becomes harder to attain. Collaborate with your IT function to build a road map for cleaning your data and integrating your systems to the extent possible.
A lengthy cycle time for adjustments will increase your organization’s risk for problems with cash flow management, reporting, forecasting, and the ability to compile accurate financial statements. The good news is that these risks are entirely preventable. Airtight policies, communication across functional areas, and integrated systems with common data definitions will all benefit cycle times for this measure — which means more satisfied customers and more time for your team to spend on activities that drive value for the business.
Perry D. Wiggins, CPA, is CFO, secretary, and treasurer for APQC, a nonprofit benchmarking and best practices research organization based in Houston, Texas.