The State of Credit and Collections
Looking back at the last decade, under construction accurately describes the nature of the B2B collection industry. Previously, collectors relied on aging reports – bulky printouts of their portfolio of accounts receivable as the centerpiece of their recovery efforts. The collection process was paper-intensive and largely manual. Then 10 years ago, the introduction of workflow-based automation transformed the collection process.
However, the transformation is not complete. Specifically, collection automation is still fragmented. Though key parts have been addressed, very few firms have solved the entire puzzle. In fact, many credit departments remain in a functional silo that hinders their ability to recognize broader opportunities. In the meantime, the pace of commerce continues to accelerate, leaving credit departments hard pressed to keep up with the volume of business, not to mention keeping up with the times.
The vast majority of firms that have already implemented receivables and collections management (RCM) software have deployed point solutions, which by nature are limited in scope, rather than undertaking end-to-end process automation. Many organizations that addressed collections automation have not addressed credit, and it is even more unlikely they have done anything about the order processing aspects of the equation. The result is a lot of patches within the quote-to-cash process, but not many real fixes.
The Promise of Automation
By deploying point solutions, credit professionals inadvertently promote the continuance of functional silos. Financial and IT executives need to look beyond the traditional credit and collection function if they want to raise their credit department to a whole new level of performance. That requires uncovering opportunities to streamline and automate corporate processes, not just credit tasks.
By focusing on the entire quote-to-cash process, you will release synergies that can transform your operating environment. For example, anything that results in greater invoice accuracy will proportionately benefit collections and dispute management by reducing the number of items that require remediation. The key is to focus on the entire financial value chain with an eye to improving receivables management.
The Drivers of Financial Value Chain Improvement
There are three software functionality trends impacting the financial value chain:
- Visibility – Stems from the fact that automation assimilates a wealth of information by enabling internal and external sources to exchange data.
- Predictability – Whereas paper-based processes inhibit predictability, automation facilitates it by providing access to all this wealth of data.
- Control – Is derived from the first two: visibility and predictability being necessary to the identification of exceptions and the confirmation of actions and results that are compliant with both internal and external standards.
As a result, a new generation of collaborative tools have emerged that allow you to readily connect with internal and external partners. Within this holistic, fully integrated framework, financial and IT executives have an opportunity to investigate software solutions that will add visibility, predictability and control to the entire quote-to-cash process, not just credit and collections.
Within this context, there are five factors to consider when you endeavor to maximize the financial value chain impact stemming from the automation solutions you select. By investigating invoice accuracy, collection efficiency, front- to back-end integration, solution scope and solution scalability collectively, you will be in a better position to identify the unique challenges and improvement opportunities intrinsic to your receivables environment.
1. Invoice Accuracy
Improving invoice accuracy can have profound benefits for an organization. Accurate invoices are paid relatively promptly, whereas discrepant invoices delayed by 30 to 90 days slow. In a typical organization, more than 25 per cent of the invoices will contain discrepancies, so it is easy to understand the positive cash flow benefits resulting from an increase in invoice accuracy.
A proven way to increase invoice accuracy involves automating the transaction reconciliation process. By matching customer expectations with your order details, organizations can identify any exceptions and then take remedial action immediately to ensure proper fulfillment and billing. Visibility into the order process enables you to identify (predict) non-compliant transactions so that you can implement remedies (controls). The result will be a substantial increase in the percentage of accurate invoices, with commensurate gains in cash flow (reducing DSO) and customer satisfaction.
2. Collection Productivity
On the back-end of the quote-to-cash process, collection productivity continues to be the key challenge. Without a software solution that incorporates strategy-driven workflow, document management and embedded communication tools, collections requires a host of manual activities to contact and collect on past due accounts.
For example, in a manual collection environment, much more time is spent on support activities than on the actual collections. With collection software, the equation is reversed. By allowing collectors to devote most of their time to collections (contacting delinquent accounts), rather than support activities, productivity is dramatically increased. In addition, software improves collection efficiency, thereby realizing substantial performance gains in terms of DSO, decreases in past due balances and reductions in bad debt write-offs.
3. Front- to Back-End Integration
While substantial performance gains can be achieved with either transaction reconciliation or collection software solutions, there are exponentially higher gains when both types of front and back-end solutions are tightly integrated. Again, visibility plays a key role by adding transactional transparency to your quote-to-cash process.
Increased transactional transparency derived from both the front and back-ends of your quote-to-cash process feeds customer and system intelligence (predictability) that can be used to increase process throughput and quality (control). By addressing in an integrated fashion the credit facilitation, invoice accuracy, transaction processing, dispute reconciliation and collection management aspects of your quote-to-cash process, you gain an intelligence structure with feedback loops that drive continuous improvement. This type of a learning system that addresses multiple functions over time will deliver significantly greater improvements than single point solutions.
4. Solution Scope
By the same token, broadly based financial value chain automation solutions capture a full spectrum of data that can then be leveraged to drive continuous improvement. By building it with knowledge management capabilities, the broader a solution’s scope, the greater its potential benefits to customers and process intelligence. The six critical RCM components along the quote-to-cash continuum are:
- Transaction reconciliation
- Collections
- Dispute and deduction management
- Auto-cash (remittance processing)
- Automated transaction facilitation (eg. EDI, EIPP, ACH, EFT)
- Credit management
Rather than benefiting from the intelligence captured at just one or two points along the financial value chain, broad scope solutions monitor the entire process, including data retrieved from external partners such as financial institutions and customers. The resulting synergy drives process improvement and customer intelligence to new levels with commensurate benefits in terms of throughput and quality.
5. Solution Scalability
The fifth driver of financial value chain process improvement is your ability to implement scalable solutions. In a dynamic business environment, it is foolhardy to implement solutions that lack the flexibility and capabilities to meet your future business needs. Some of the issues that involve scalability are corporate growth, customer service, staff limitations, and global visibility.
The Technology Catalyst
Although technology is the catalyst for breakthroughs in collection performance, it cannot do the job on its own. After all, technology is no better than the processes it automates. If you simply automate deficient processes, technology cannot realize its promise of dramatic productivity gains. Thus, it is essential to use technology to implement best practices within your collection function.
The right people are an essential component to leverage the full potential of the RCM technologies you implement. Technology fundamentally changes the way people work and how they can be organized to work together. Technology allows you to automatically deliver specialized tasks to specialized workers in order to maximize the efficiency of your staff. Likewise, technology facilitates a variety of deployment models that are readily adaptable to the needs of your unique organization. In the final analysis, the key to success is to adapt people, process and technology to achieve your goals.
Summary
Though under construction for more than a decade, we can confidently say that all the building blocks are now in place to construct an automated collection process that draws efficiency from every touch-point it has with the quote-to-cash cycle. Collection software, with its powerful productivity tools, is in and of itself only one piece of the puzzle.
An efficient collection process involves much more than how you contact delinquent accounts. It involves utilizing pre-invoice transaction reconciliation tools and intelligence gleaned from the post-payment deduction reconciliation process to increase invoice accuracy. It involves merging credit risk management into your collection prioritization and collection strategy procedures. It involves enhancing the processes for exchanging billing and remittance details between trading partners along with automated mechanisms for funds transfer. It involves implementing scalable and flexible solutions that address evolving business needs. It involves modifying the structure of your credit organization and possibly partnering with a receivables management firm to supplement your staff and leverage your technology.
Consequently, financial and IT executives need to take a holistic view of collections. Pigeonholing collections within a functional silo is a prescription for underperformance. Focusing your attention and efforts on the entire quote-to-cash process will achieve superior cash flow and working capital management, besides adding value to your customer relationships.