The invoice-to-cash process is an often overlooked and under-leveraged opportunity to drive business efficiency, increase cash flow, and strengthen customer relationships. Companies that approach this process with strategic goals in mind gain considerable advantage over those that do not. While it is certainly important for a business to recognize, and focus, on reducing the costs involved in the invoice-to-cash process (people, material, equipment, IT time, bank fees, postage), the benefits go much further.
As part of a 21st-century invoice-to-cash strategy, companies should look beyond the operational aspects and explore the specialized knowledge, experience and technology required to offer a world-class invoice-to-cash system that gives them a strategic advantage. In essence, a strategy that allows a company to achieve optimal functionality, maximum business impact and excellence in customer satisfaction. Based on in-depth interviews with businesses that have transformed their approaches to invoice-to-cash, we’ll examine the opportunity to use this process to create strategic value.
The Many Values of Strategic Invoice-to-Cash
Think about your company’s invoice-to-cash process, and then ask yourself these questions:
- Do you have a growing population of customers demanding new ways they want to receive invoices and pay them?
- Are your invoices well designed? Do they create clarity, eliminate customer confusion and reduce time-to-payment?
- How rapidly are your invoices delivered, either through the mail or, better yet, through web-based systems? How might that enhance your access to working capital?
- How efficient is your company at applying payments once received? Is there too much manual effort? A struggle to apply electronic payments? Are you manually keying in data from paper checks?
- Are you making it easy for your customers to do business with you? Do you have an opportunity to create a strategic advantage?
Businesses can transform their invoice-to-cash process so that they have the best answers to these questions.
Many financial managers have realized the strategic advantages that come from invoice-to-cash. Some emphasize that they enjoy enhanced customer service, others focus on the personalized messaging they use to upsell, some stress how they use invoicing to foster brand loyalty. Most important is the linkage they highlight between an improved invoice-to-cash process and days sales outstanding (DSO).
Clarity, Choice, and Speed-to-Cash
Topping the list of value-creating invoice-to-cash strategies are activities that improve DSO, including invoice design, electronic invoice adoption programs, a well-designed Electronic Invoice Presentment and Payment (EIPP), and an intelligent cash application process.
Invoices should be easy for customers to understand, reduce the number of calls to a customer service department, and help a business get paid quickly.
Another key area that drives speed-to-cash is electronic invoicing. Optimized, paper delivery of invoices and statements is no longer sufficient. Modern invoicing systems require multiple options—electronic data interchange (EDI), email, online, AP System integration and fax—for delivery of invoices, as well as for payment. A key advantage of electronic invoicing is that it virtually eliminates invoice delivery time to customers, helping the cash get in the door sooner. That speed has made a difference for Thos. Somerville Co., a Mid-Atlantic distributor of plumbing, heating and air conditioning supplies, which is sending 71% of its invoices electronically. Pete Misiewicz, vice president of IT at Thos. Somerville, explains, “Because many of our customers receive their invoices electronically, conversations about invoice disputes now occur a week earlier, meaning they are resolved sooner.”
Before Ames Taping Tools outsourced its invoicing, its mail house was in South Carolina, but its biggest concentration of large customers was in California. Their customers were frustrated that they could not take advantage of early payment discounts because they were not receiving their invoices in a timely manner. The Ames credit group had to manually print invoices for their key accounts and fax/email them to their customers so they could take advantage of the discounts. These types of manual processes exist across many organizations today. With Ames’ new invoicing system, the company is mailing its invoices and statements from multiple locations across the U.S. and Canada, accelerating mail delivery time by 2-3 days. Further, Ames has migrated many of its customers to electronic delivery, eliminating the mail time from the equation altogether.
Automated, Intelligent Cash Application
The invoice-to-cash cycle begins with invoice delivery and payment, but isn’t complete until cash is properly applied. Once payment is received, the funds have to be accurately applied (posted to a system of record) for a company to realize payments as revenue. Delays in cash application also put DSO at risk.
Cash application is challenging because buyers pay in a variety of ways. Whether they pay by check to a lockbox, directly to headquarters, or at a remote location, the data on the checks has to be captured, which often involves manual keying. Even when buyers submit electronic payments, they frequently come decoupled from the invoice, making matching a challenging resource-intensive task. Exception handling poses yet another challenge. As much as a business strives for 100% match rates, the reality is this: exceptions will occur. Handling exceptions takes time and resources, and is a big cause of increasing DSO.
Automating the cash application process from end-to-end cuts costs and can shave days off DSO. Through technology, sellers can automatically extract transactional data from any source and intelligently match to open receivables, which can dramatically improve hit rates whether payments are coming by check or electronically. And having a user-friendly tool to efficiently work through the inevitable exceptions can get payments posted quicker without dependence on a large manual staff.
Avnet is one of the primary distributors of computer products, electronic components, and embedded technology in the world. As Avnet has grown, their need to process payments more efficiently also grew. Their vice president of financial operations, Jim Strand, focused on streamlining their cash application process. “We did not mess around. We made a commitment to reinvent the process by eliminating manual touch points like data entry and image capturing. The end result for us was a significant lowering of costs; same day payment processing and much higher payment match rates.”
In the second installment on this topic, I’ll cover the importance of customer satisfaction, digital signatures and finding strategic partners.