Ebbing cash flow is creating an urgent priority for IT leadership: do what is necessary to increase cash flow now.
The IT department is increasingly justifying its existence based upon net contribution to profits and order to cash. However, budgets for large projects are woefully lacking. Fortunately, there are alternatives that both minimize capital expenditure and increase automation. The key is to identify tactical, self-funding projects that provide efficiency and directly impact cash flow.
EMBRACING SHARED SERVICES
With restrictions to borrowing and personnel reductions, leaders are looking to consolidate their centralized business functions. These “activity centres” provide Shared Services that allow more efficient competencies within a company that different business units, operating companies and locations can take advantage of. Shared Services allow IT and other departments to focus on specific activities, while eliminating redundant resource and overhead costs and activities. At the same time, centralization can frequently help companies to better incorporate best practices, particularly when multiple operating companies are involved.
The concept of Shared Services is not new, but it has never been more viable than it is today. One major reason for this is, quite simply, global high-speed Internet availability. Coupled with the Software-as-a-Service model of Web-based and pay-as-you-go software, companies can take advantage of vast economies of scale.
Shared Services involve a consolidation of systems, resources and unique skill sets. All or parts of IT itself can become a Shared Service. IT can also support different business units in transitioning and supporting Shared Services. Common examples of Shared Services are accounts receivable, EDI, collections, purchasing, call centres and human resources. Shared Services can support multiple operating companies and geographies. But with changes in geography come a need to assure a clear understanding and ability to execute within different governmental regimes, cultures, time zones, locations, and methods.
Like all enterprise-wide projects that involve consolidation, communication is key, and data exchange is the primary agent that will assure optimal execution. Just as Enterprise Resource Planning software enables a single point of truth through which the entire company interacts, Shared Services also needs a common point of truth, frequently between geographically dispersed business units. Because today’s supply chain involves the exchange of highly diverse data, with external trading partners that have a myriad of functions and capabilities, the more integrated, accessible and real-time the information, the better.
For example, a Credit and Collections Shared Services centre must have the tools to notify sales and operations of trends within customer groups and specific accounts. The forecasting of cash flow through ‘day sales outstanding’ impacts cash, and all business units.
While Shared Services provides an opportunity to reduce costs, it also implies risk. Careful and thorough planning and risk analysis is key. Identifying the actual cost/benefit scenarios must involve variable what-if scenarios that include labour costs, software systems, hardware, communication platforms and other factors that are often difficult to see.
“A Shared Services migration must take into consideration internal strengths, supply chain complexity, and the IT infrastructure. Shared Services needs an increased reliance on communication and data visibility,” said James Williams, Executive Vice President of Avatar Partners.
INCREASING CASH FLOW
Whether moving to a Shared Service or to an outsourced model (see page 20), there are several key areas where supply chain and cash flow can work very tightly.
It is well known that the method in which a company communicates to its trading partners has an enormous impact on cash flow. Invoicing has long been automated through methods such as EDI and electronic commerce. Our customers typically reduce day sales outstanding (DSO) by three to eight days by using EDI (while at the same time reducing manual errors and rework). But many companies are not completely on EDI, and they don’t see what this is costing them. For example, if a $250M supplier does 94 per cent of its business through EDI, and the remaining 6 per cent is manual, the amount of money manually invoiced is $15,000,000 per year. If DSO on 6 per cent of revenues can be reduced from 36 days down to 33 days, then attaining 100 per cent electronic invoicing will result in $2.7M in additional cash flow per year.
Suppliers argue that their trading partners are not able to trade through EDI. In this scenario, it makes sense to work with industry experts who can help to implement lower cost workarounds that will enable a win-win benefit, such as eInvoicing or managed file transfer. “The additional cash flow is worth the effort involved in jointly exploring alternative electronic integration between manufacturer and supplier,” noted Williams
As one example, a supplier will become aware of an invoice discrepancy at the point of collections, which can be 30 to 45 days after invoice. Combining business analytics with EDI provides the visibility to capture and act upon information proactively, and make adjustments as close to the original invoice date as possible. Best practice achieves an operationally proactive level of automation, whereby there is automated and exception-based notification of invoicing errors before cash flow is delayed. Similar efficiencies can be achieved in all areas of the order-to-cash process by integrating intelligent business systems that support real-time and exception-based decisions.
BEEFING UP COLLECTIONS
As important as Credit and Collections has been in the past, in the days and months ahead, Collections will become an even more mission-critical function for companies that hope to survive.
Collections must be able to quickly and effectively track the entire order-to-cash cycle. Anything that improves results in collections is worth considering. According to industry averages, more than 50 per cent of collection delays are due to internal processes.
Typically, the biggest procedural hurdle for collections managers is a lack of visibility and timely information. This problem is compounded because most legacy systems do not provide enough automation, visibility and control for the collections process. Collections agents need to be able to manage a single point of communication between sales, operations, collections and customer service. Being able to identify and focus on high impact activities, apply treatments at group and account level, leverage existing systems, and proactively involve customers, sales and operations is key. Order-to-cash visibility can be well supported with solutions that integrate to existing systems, and which are available as a Software-as-a-Service (SaaS), enabling a quick return on investment and immediate cash flow.
Cash is as good as what you do with it. Finance and treasury needs a single point of visibility and control to cash. IT knows that the bottleneck is always data from external parties. Most ERP and accounting systems reconcile receivables up to 80 per cent and rely on manual, repetitive processes for the remainder. With lending as tight as it is these days, the time delays of 20 per cent of cash cannot be justified. It pays to consider a solution that can reduce this percentage to 1 to 2 per cent of sales.
BUSINESS PROCESS OUTSOURCING
Every company has an Achilles heel. In these difficult economic times, companies must diligently scrutinize functions or departments that are not executed well, no matter what the cause.
Dorothy Pacella, director of Client Care & CheckNet Operations for Apparel Labeling Solutions at Checkpoint Systems Inc., with offices in Markham, Ontario, says “Be vigilant with process improvement. Look for redundancy. Ask ‘Why?’ five times to confirm the value of the process.”
Some functional areas can be mission-critical in that they directly impact sales and cash flow. One indicator of a potential problem is when a company is dependent upon only one or two people who know the inner workings of mission-critical processes, events or systems; and in the absence of these people, the business could come to a grinding halt. These days, that is too high a risk to carry.
Business Process Outsourcing is an option worth considering if a company wants to go back to what it does best – its core competencies – while still controlling cost and risk. When well implemented, BPO can save companies two to ten times traditional in-house costs. BPO can be structured so as to guarantee predictable timelines and service levels, and it can also reduce the cost over time. Companies of all sizes can benefit from BPO. It can work very effectively in situations where data must be exchanged on a regular basis between the company and external trading partners, such as Electronic Commerce, Managed File Transfer (MFT), Vendor Managed Inventory (VMI), and Electronic Data Interchange (EDI).
On-demand BPO (Od-BPO) is an increasingly popular option; the “on-demand” prefix means that a company only pays for what it uses (as opposed to paying a fixed cost).
Od-BPO can include management of daily operations, customer outreach functions (communication), data integration, and management of software systems. Whatever type of consolidation or BPO is considered, key questions to ask are: How will this affect the Order to Cash cycle? How will this reduce risk and exposure? How will this serve to increase sales?
It is critical to choose a trusted partner who is willing to deeply understand your business and who understands the impact of that functional area on the business. Because BPO frequently includes both data and verbal communication with your business community, the partner must have strong communication skills that reflect and enhance your company’s corporate culture, image and values.
Even in hard times, the financial and physical supply chain are tightly interlinked. What we always like to ask is, “If you knew one thing about your supply chain that would dramatically impact your cash flow, what would that be?” Finding the answer is closer than you think.
Marlo Brooke is president of Avatar Partners (www.avatarpartners.com), a software developer and business process outsourcing provider of solutions to rapidly improve cash flow and manage money throughout the supply chain process. She can be reached at [email protected]
