Middle-Market Treasury Challenges in Accounts Receivable
To be effective and efficient, treasury departments must continually overcome a variety of business hurdles, including economic, technical and human resource challenges. These days, treasury managers have to “do more with less” and compliance efforts, such as those driven by Sarbanes-Oxley, aren’t making their jobs any easier. These challenges help to explain the increasing adoption of automation and other efficiency efforts among middle-market companies. Considering resource constraints and lack of significant economies of scale present in larger corporations, middle-market organizations are taking an incremental path to achieving efficiencies, yet still reaping meaningful benefits.
Recent ethnographic research1 undertaken by ABN Amro probed middle-market companies’ accounts receivable processes, from the intricacies of daily processing to the broader strategic implications. This research generated valuable insights into the specific challenges faced by middle-market organizations and also illustrated the effective, often creative, approaches they are taking to overcome them.
While ABN Amro’s research provided constructive insights into how to better serve the client base, participating clients also benefited directly and immediately from learning about successful solutions implemented by their peers. The focus of this article is to share these success stories to facilitate the drive for efficiencies in other organizations.
It is important to note that many of these companies do not formally quantify the savings provided by efficiencies implemented – often because many of the solutions show an obvious benefit and the investments are minimal. Resource constraints come into play here, as well as the fact that middle-market companies often don’t have the staff bandwidth to perform ROI calculations on minor initiatives. Nonetheless, it became clear, talking to company after company, that these basic or innovative approaches to efficiency have a meaningful impact.
Companies are taking positive steps towards improving treasury operations – receivables in particular – by making efficiency a strategic priority. ABN Amro’s research showed organizations using technology solutions and innovative policies and procedures to improve workflow, accuracy and customer service, and to provide meaningful information for management decisions – ultimately positively affecting cash flow. It also illustrated the impact, both positive and negative, of the migration to electronic payments.
Similar to large companies, middle-market companies implement A/R products and services to drive efficiencies, reduce days sales outstanding (DSO) and operating costs, improve cash flow, mitigate the risk of non-payment, and increase their ability to manage critical payments. Middle-market companies have desires similar to those of large companies; their toolbox for meeting these needs is just a little smaller. Given the confines of available resources, middle-market companies tend to supplement technology solutions with innovative policies and procedures.
Ranging from implementation of new ERP systems or modules to stand-alone software to bank services, technical solutions are increasingly bringing efficiencies to the middle market. As the cost of automation goes down, options are becoming more widely accessible. Most middle-market companies are relying on downloads of lockbox information from their bank to automate posting of receivables. Representative of many of the companies studied in the research, one $600m manufacturing and distribution company automated posting of its 500 monthly lockbox payments, achieving “hit ratios” in the mid 80 per cent range.
Continual improvement of matching criteria and exception reporting adds to the efficiency. This automation of previously manual processes allowed an A/R specialist to allocate hours saved to assist credit and collections in checking credit references and pulling credit reports, which had a positive impact on cash flow and customer service. This is important for middle-market A/R staff who tend to be lean and therefore don’t always expect re-engineering efforts to reduce the number of employees. Instead, their hope is often that these efforts will enable them to redirect small increments of an employee’s time to new tasks that have a more direct impact on the bottom line.
In other technology advances, companies accessing check images have achieved efficiencies in posting and research. The immediate, self-service nature of check images allows receivables specialists to speed research and electronically route inquiries and images within the company, often dramatically improving posting time. For example, a $900m petroleum chemicals and gas processing company was able to slash exception item resolution from one to two weeks to one to two days.
Other organizations have adopted workflow tracking systems of various sophistications to distribute, track and follow up on exception or critical payments. Our research showed companies utilizing all levels of technology, from e-mailing Excel spreadsheets to different departments for research on unpostable items, to workflow management software that speeds credit and collections.
Many automated solutions were “homegrown,” either developed by internal IT resources or by enterprising treasury staff utilizing ubiquitous tools, such as e-mail and Excel spreadsheets to streamline processes.
When middle-market companies invest in commercially available automation, it is generally low or moderately priced, and often targeted to a specific business function. For example, one organization studied purchased collections workflow software to facilitate and standardize communication with past-due clients. The system uses automated workflows to apply a consistent decision matrix on all past due items, guiding credit and collections personnel as to when to send out pre-formatted letters or faxes, and when to escalate issues to the next level. The system improves staff productivity and provides management with added tools for analysis and reporting.
When driving efficiencies via policies and procedures, many companies focus on internal and external education. Simple solutions are sometimes the most effective. For instance, one company in the study created customer education letters to communicate the need for accurate information to customers that remit payments without adequate posting data. The letters increase the probability of proper future documentation by spelling out what critical data (e.g. invoice or customer account numbers) the company needs. Granted, original payments must still be identified, and not all clients comply due to their own A/P constraints, but this basic approach results in improved automated posting percentages.
Another simple, yet effective, solution reported by a company in the study is a policy to phone customers owing large amounts 10 days after the invoice is mailed. The call ensures receipt of the bill and that all critical documentation was included. This company’s proactive approach has had a positive impact on customer relations and trimmed days off DSO on these high value invoices by addressing issues that may delay payment up front versus after the payment is late.
Middle-market companies are migrating to electronic payments, often due to trading partner mandates, but increasingly due to their own drive for efficiency. Consistent with the recent Association for Financial Professionals’ 2004 Electronic Payments Survey, companies face many hurdles in integrating electronic payments into the often automated flow of check payments, including issues of integration and problems arising from lack of standardization of data formats.
The overwhelming majority of clients studied post most electronic payments (including ACH, EDI, wire and credit card) manually, while check payments are automated. The irony of this situation is the lack of a critical mass of electronic payments (over 80 per cent of business-to-business payments are made via check) to justify integrating and mapping data feeds of electronic payment data. Middle-market companies are slowly reaching that “tipping point” where such investment will become justifiable.
Credit card acceptance is another opportunity to foster efficiency in receivables, although the short-term impact often has the opposite affect. More middle-market companies are receiving credit card payments, driven by customer demand and the desire to expedite cash receipt, especially on small dollar items. Initially, due to low volumes, most companies put manual processes into place, and even duplicate processes in multiple sales offices. As volume grows, inefficiencies in the labor-intensive procedures are exacerbated, leading to implementation of standardized processes and automation. The payoff can be significant, as in the case of one company studied that experienced a reduction in DSO due to settlement of funds in 3-4 days, rather than 30+ days with a check payment. It also significantly reduced the credit and collections efforts associated with chasing smaller dollar past due amounts.
Even so, the requirements of traditional auditing methods foster inefficient processes in electronic payment processing. Company audit procedures often require printing and archiving information on electronic payments, such as copies of remittance data, which will continue to reduce potential gains from automation and other efficiency efforts.
ABN Amro’s ethnographic research provides a unique view into the issues that challenge treasury with regard to receivables. Middle-market companies are taking incremental, positive steps to improve processes and drive efficiencies that improve customer relations and cash flow, but there’s no magic solution to speed up this process. Instead, each company must take a holistic look at its practices, and develop cost-effective solutions that align with long-term goals. Technical or policy-oriented, complex or basic, incremental changes are making a difference for middle-market companies.
1 Ethnographic research relies on both interviews with participants and extensive observation of those participants in their job environment to reveal new dimensions of the process and uncover underlying and often unspoken needs. In our accounts receivable ethnographic research, ABN Amro involved a wide spectrum of roles within middle-market companies, ranging from A/R specialist, A/R manager, credit manager, cash manager, treasurer and controller. Trends identified during the onsite research were further validated with a larger scale e-mail survey to validate and broaden the results.