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Unlocking greater profitability from receivables management: executing well on three basic processes can do a lot to clear disputes, reduce outstanding invoices and ensure a better revenue stream.

Companies work very hard to increase revenue. Investments in sales training, resources, advertising, marketing, new product development and acquisitions are common actions to increase the top line. When revenue growth is achieved, management expects greater profitability and cash flow to follow, yet these expectations are often unmet because: a) uncontrolled costs negate the incremental profit and/or b) working capital increases absorb the expected cash flow.


Achieving excellence in managing accounts receivable is critical to realizing and optimizing the profit and cash benefits from increased revenue. In working with over 100 companies to generate over $500 million of cash from implementing best practices in receivables management, it's been discovered that these three keys for unlocking greater profitability need to be present:

* a properly conceived and executed portfolio strategy;

* a fast and effective dispute resolution process; and

* accurate order fulfillment and invoicing.

1 Executive Portfolio Strategy. A portfolio strategy is a definition of how to manage a receivables asset. Just as different customer segments require customized marketing approaches, various collection approaches are needed for distinct categories of customers. For instance, you wouldn't collect from an occasional, small-volume account the same way you would from a top-10 customer.

Examples of categories to be managed differently are government vs. private sector, export vs. domestic and national accounts vs. small accounts. A properly formulated portfolio strategy, executed with the right processes, resources and organizational structure, will keep cash flowing and minimize bad debt exposure.

The portfolio strategy must also support a company's overall strategy for the receivables asset. For example, receivables can be: a) a financing tool for customers to be used as a competitive advantage in the marketplace; b) a source of cash flow to fund the business; or c) a way to generate high-margin, incremental revenue by selling to high-risk customers.

Experience shows that most companies have not specifically articulated how receivables management fits into their corporate strategies, but instead, view it as a necessary cost of doing business. This approach, by default, seeks to minimize the investment and cost of the asset, while not constricting sales too much.

Another way to look at the strategic impact of receivables is to view them as a capital investment. Most Fortune 500 companies require senior management or board authorization of a $25 million investment in fixed assets, but fail to notice that the investment in the receivables asset can often increase by $25 million or more year-to-year without formal approval. This often results in a large capital investment with a substandard or uncertain rate of return that has circumvented formal approval protocols.

2 Dispute Resolution Process. A dispute is any reason (other than cash constraints) for a customer to delay or take a "deduction" from an invoice. Disputes generally arise from invoicing the wrong price or quantity, omitting purchase order numbers or product/service quality issues. Experience shows that over half of receivables greater than 30 days past due are disputed, so the speed in which disputes are researched and resolved with the customer can directly decrease the number of past-due receivables.

Expedient dispute resolution also produces two other benefits: 1) it increases cash flow by releasing payments that have been delayed due to a pending dispute; and 2) it reduces disputed amounts often conceded to the customer for no reason other than extreme age. Remember, customers dispute invoices when they think there is an error. Since their assumptions are often wrong, the full amount of a disputed invoice can frequently be collected if the "error" is addressed promptly.

A case study from this author's book, Best Practices in Accounts Receivable Management, clearly illustrates how an effective dispute resolution process can revitalize an organization: A high technology firm was experiencing an especially serious receivables management problem. Bad debt exposure and the investment in receivables was excessive, with days sales outstanding (DSO) in the low triple digits. Millions of dollars in disputed amounts were being conceded annually--not in response to valid customer disputes, but simply as a function of age.

In addition, the company's stock price was depressed because of the high DSO. Wall Street analysts interpreted its customers' reluctance to pay as an indication that the new products did not work properly or products delivered on a trial basis were not true receivables.

Over an 18-month period, the firm completely redesigned its receivables management process, tools, staff skills and management culture. A key action taken was implementing a formal dispute-resolution process, which quickly reduced the firm's DSO from 104 to 61 and lowered conceded disputes by 75 percent. The benefits from the company's improvements in its receivables included a huge increase in the stock price and an increase in cash on hand equivalent to four months of sales.

3 Accurate Order Fulfillment and Invoicing. The receivables asset reflects the quality of the entire revenue cycle operation. If an error is made in taking an order, fulfilling it, invoicing it or applying the customer payment, or if the customer is dissatisfied with the product or service, it will manifest itself as a past due or short payment in the receivables ledger.

The quality of the receivables asset is an excellent barometer of customer service. It's feedback the customer willingly and quickly gives.

Accurate order fulfillment and invoicing is the corollary of an effective, rapid dispute resolution process. If all orders are fulfilled correctly and billed accurately, the customer has no good reason to delay or short-pay an invoice, and disputes should be prevented.

In addition to improving cash flow, accurate order fulfillment and invoicing enhances a company's image as a total quality supplier and improves productivity among the staff processing orders, interacting with customers and collecting receivables. Imagine how much additional revenue could be generated by increasing the selling time of your sales force by 10 to 15 percent!

Naturally, there are many other factors that affect receivables management results. Credit risk evaluation and control, application of technology, utilization of proper metrics and management support are some of the primary ones. However, using the three keys discussed here will allow a company to unlock greater profitability and cash flow through:

* increased cash generation that can be used to repay debt, increase dividends, repurchase stock and invest in profit-producing opportunities--all of which will raise the stock price;

* reduced bad debt and "concession" loss;

* improved credit sales and more available selling time; and

* enhanced customer service and satisfaction.

John G. Salek ( is the national leader of Parson Consulting's Receivables Cycle Management practice. He is the author of Best Practices in Accounts Receivable Management, (John Wiley & Sons Inc., 2005).


* When revenue growth is achieved, management expects greater profitability and cash flow to follow, yet these expectations are often not met.

* Most companies have not specifically articulated how receivables management fits into their corporate strategies, but view it as a necessary cost of doing business.

* Over half of receivables greater than 30 days past due are disputed, so the speed in which disputes are resolved can directly lower past-due receivables.

* In addition to improving cash flow, accurate order fulfillment and invoicing enhances a company's image as a quality supplier and improves staff productivity.
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Title Annotation:cash management
Author:Salek, John G.
Publication:Financial Executive
Geographic Code:1USA
Date:Oct 1, 2006
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