Want to boost cash flow? Change how you manage the order-to-cash process

In today’s volatile markets and global environment, businesses must be able to react quickly to both opportunities and challenges. Therefore, maintaining positive cash flow is more critical than ever before.  It’s important to recognize the many points at which cash flow can be impeded, and implement better practices.

One key area of particular importance is the order-to-cash process.  That is, the steps taken from the time an order is received through to getting the cash in hand. This includes activities such as order entry, billing, and collections. Correcting common mistakes in these areas will go a long way toward boosting access to cash.

Sales and Customer Management 

If you want your customers to pay you more quickly—or even just to pay you on-time, you need to start at the beginning. A sales team hungry to close deals often has a lot of discretion and can enter all sorts of arrangements on behalf of the company. Pricing and profit margins are almost always closely watched by management, but many seemingly little decisions made by the sales team can greatly affect financial performance downstream and often go unnoticed. This matters because each little decision adds up and further delays the collection of cash.

Start by recognizing that not all customers are equal. Some cost far more to serve than others, not only because of the discounts they negotiate but also because of commercial terms requirements. Segmenting your customer base, you might discover the Pareto principle applies. That is, 80% of your sales are quite possibly generated by 20% of your customers. Do we want to offer all sorts of one-off accommodations to the 80% of customers that likely only generate 20% of sales? Being clear about this and frequently reviewing the costs to serve customers with your sales team, is key to ensuring they help make informed decisions.

You also need to train and incentivize your sales teams. Far too often, commissions for sales teams are paid based on the order versus based on the collected revenue. Linking these payments to cash received helps motivate the sales team to get the best price and margin as well as terms that are cash positive. At a minimum, you should have commission/bonus claw-back provisions for seriously late paying or deadbeat customers. You want sales teams to be incentivized to optimize their compensation, generating revenue for the firm. You also want to be sure that revenue converts to cash as quickly as possible.

Credit and Risk Management 

While customer segmentation is important, there are also times for treating everyone alike. Many businesses get into trouble by overextending credit to big customers or allowing basic risk management practices to wane because of friendly, long-term relationships. Credit and risk decisions should be carefully guarded, and deviations should be managed by the most senior officers.

It is common to perform credit reviews for new customers, but far too often businesses fail to perform basic ongoing reviews. For example, a customer that always paid on time is now increasingly paying late. Does that trip any sort of alarm? Or in the case of a chronically late paying customer, do you review your overall exposure? Do you continue to provide services or sell products?

And do you have a firewall between those managing these reviews and those selling and managing the relationships? Credit and risk management must be separate from sales, marketing, and customer management.

Payment Management 

Your customer has finally committed to pay. You are home free—right? Well, how your customer remits payment and how you post the payment or apply the cash represents additional opportunities for complications and cost.

The Association of Financial Professionals (AFP) estimates that in 2021, 91% of businesses in the US still accept checks as a form of payment. This is by far the most expensive way to pay and to receive payment. AFP further estimates that checks can cost the issuer between $2 and $4 per check and the receiver can occur up to an additional $2 in costs associated with processing. These costs start to balloon for large and complex organizations. Despite a steady push toward electronic payments, we seem to be stuck in the past, using a very inefficient form of payment. And, in addition to the cost of payment, there are delays associated with float—or the time it takes for the issuer to send and the receiver to present to their bank and then for the issuer’s bank and the receiver’s bank to reconcile.

Banks have stepped in, providing a service called lockboxes. These are secure postal locations where the bank receives checks and posts directly to a customer’s account. This takes a few steps out of the process, but it doesn’t completely solve all the problems associated with checks. Reconciling the payment to individual invoices can still pose problems.

Let’s say you sell equipment and services to ABC company over a period of a few weeks. And perhaps there are six different invoices involved. ABC decides to consolidate and send one check. You still need to figure out how to apply that payment against each invoice. If everything adds up perfectly the process is straightforward. But, if ABC short pays for some reason, then trying to decipher how to apply the cash can cause real headaches. It doesn’t lessen the time you have the cash, but it can drive up administrative costs. Or let’s say the opposite occurs and ABC overpays. You now need to figure out if you should issue a refund, apply this to another outstanding invoice, or hold as a credit. All these options—particularly if multiplied by thousands for a mid-size business—create work and expense. Electronic payments don’t eliminate all these problems, but they do dramatically streamline processing.

Moreover, rebates, discounts, and various financing options complicate the downstream process of applying cash. Fortunately, there are several very effective software solutions that use artificial intelligence and robotic process automation. These applications can dramatically reduce the administrative time and cost spent in the cash application process. Further, complexity creeps in when the focus is primarily on revenue growth. When leaders take a balanced approach and consider total cost to serve as well as the impact on cash flow, commercial arrangements become more intentional.

Written by Peter Kingma.

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