Cash & Liquidity ManagementCash ManagementAccounts ReceivableA Measure of Success: Employing Metrics to Improve Customer-to-Cash Practices

A Measure of Success: Employing Metrics to Improve Customer-to-Cash Practices

What metrics do other firms use to monitor / improve customer-to-cash practices?

In relation to cash forecasting there are a number of metrics that can be used
to account for process delays, cash likelihood and conversion efficiency. Generally
speaking the key working capital ratio of DSO (Days Sales Outstanding) based
on an exhaust calculation method is still a solid method to measure overall
receivables performance. However, additional measurements are needed to drive
sub-processes and increase the accuracy of cash forecasting.

Quote-to-Order

If you start your cash forecasting with the sales funnel, a weighted measurement
for your expected forward order book should be utilised. This should be based
on the likelihood of conversion and stage in the sales process. The time delay
in the Quote to Order process also needs to be taken into account. Some key
measurements are:

  • Quote conversion ratio (weighted)
  • Quote cycle time
  • Order accuracy ratio
  • Weighted contractual payment terms given
  • Risk scoring
Order-to-Invoicing

The application of metrics for the Order to Invoicing process depends on your
industry, especially when utilising these to build a cash-forecasting model.
The measurement should focus on delivery accuracy and delays that impact the
progress towards invoicing and cash conversion. Some key measurements are:

  • Order to delivery cycle times (weighted)
    – This may be adjusted by the rolling measurement of weekly orders processed
  • Invoicing accuracy ratio
  • Delivery accuracy ratio
  • On time delivery ration
  • Order discrepancies ratio
  • Blocked / frozen order occurrence
Post Invoicing

Here the focus to drive receivables performance and cash forecasting should
be on the measurement of risk variance, customer payment performance and dispute
resolution performance.

First, as in the Quote-to-Order process adjustments should be made for the
variation in customer and country risk. For example, in some countries approx.
80% of customers with a credit score of four end in bankruptcy, thereby impacting
your cash forecast. Some key measurements are:

  • Credit risk scoring & credit limit breach
  • Bad-debt & write-off ratio & trend
  • Receivables aging

Secondly, historic payment performance provides vital intelligence for accurate
cash forecasting. Payment behaviour can be predicted by analysing the variance
and trend of performance at customer level. Some key measurements are:

  • Rolling DBO (Days Billing Outstanding) trend, measuring performance from
    invoicing rather than revenue recognition as used by DSO
  • An alternative is the Days to Pay indicator, measuring the period from invoicing
    to cash-receipt
  • The speed of collections can also be measured by a aged debt rollover analysis

Thirdly, the likelihood of disputes and their cycle times gives additional
insight into process performance and customer payment behaviour. The larger
the value in dispute and the longer the cycle times, the less likely you are
to collect. Some key measurements are:

  • Dispute cycle times weighted by value
  • % of receivables in dispute
  • Credit note to sales ratio
    – Rout cause analysis to identify process improvement needs

While all measurements are useful to manage the customer-to-cash process, the
tricky part is to integrate the right indicators into a cash-forecasting model.
Also, measurements are just half the story, the other is governance. A corporate
credit policy should outline process rules and the way indicators are measured
to ensure accurate interpretation.

Whitepapers & Resources

Transaction Banking Survey 2019

Transaction Banking Survey 2019

8m
TIS Sanction Screening Survey Report

Payments TIS Sanction Screening Survey Report

11m
Enhancing your strategic position: Digitalization in Treasury

Payments Enhancing your strategic position: Digitalization in Treasury

1y
Netting: An Immersive Guide to Global Reconciliation

Netting: An Immersive Guide to Global Reconciliation

1y