Abstract
World-class finance executives get customers to pay their bills nearly 30%
faster than typical companies, according to research from The Hackett Group.
Hackett’s analysis found that a typical $10 billion company can generate more
than $35.8 million/year in bottom-line savings if they achieve world-class
performance in this area by reducing Days Sales Outstanding (DSO), a standard
measure of how quickly companies get paid by their customers.
Hackett’s research also showed that companies with world-class performance
organisations have significantly reduced their DSO over the past three years
while typical companies have made only slight improvements.
One key strategy of world-class companies in this area has been to dramatically
lower billing error rates in order to eliminate any reason for delayed payment.
In addition, these world-class performance organisations have made significant
improvements in their Invoice-to-Cash procedures, driving higher levels of
efficiency and effectiveness through the use of Hackett-Certified™ practices
such as better cost and pricing analysis, and faster cash application.
The savings garnered by world-class performance organisations through the use of
these techniques can improve profitability, or they can be used to fund
virtually any high-priority corporate activity, such as strategic initiatives,
competitive differentiation, or reports to penetrate new markets.
Mark Krueger is a
Senior Business Advisor and founder member of The Hackett Group.
Robert Smid is the global head of Hackett-REL’s customer-to-cash
practice.
Today, the best CFOs are doing an exceptional job of balancing efficiency and
effectiveness, and their companies are reaping the benefits.
They’re proving it’s possible to maintain a focus on business value, and
generate real bottom-line benefits by doing things like reducing DSO, while at
the same time keeping a sharp focus on cost reduction opportunities.
The message for typical CFOs is both clear and disturbing.
To survive, they cannot wait any longer to close efficiency gaps and implement
effectiveness-increasing strategies.
Because every day they wait they’re leaving opportunities on the table that can
have a material impact on their company’s profitability.
Other than insolvency, there are two major reasons why customers pay their
vendors late – because they have a dispute, or because they’ve been conditioned
to do so by the vendor.
Both of these are areas that companies can address and reap impressive rewards.
By reducing how often a bill goes out with the inaccurate pricing, wrong terms,
or any other mistake, companies can significantly streamline collections.
The conditioning process is more complicated. But with the right people and
tools in place, companies can develop a better understanding of their customer
base and the impact individual customers and customer segments have on their
profitability.
Then they can take a more proactive, targeted, and strategic approach to
collections and significantly reduce DSO.
According to our research, world-class performance organisations now spend 42%
less in the finance function than typical companies (0.73% of revenue versus
1.26%), and have 44% fewer finance staff. (63 employees/ billion of revenue
versus 112).
The cost gap between world-class and typical companies is also growing.
Typical companies saw an increase in the cost of finance of 18% over the past
two years, in part due to increased compliance-related costs, while world-class
companies continued to reduce overall finance costs over the same period.
Dramatic DSO gap, stunning financial benefits
The gap between how quickly world-class and typical companies get paid is
significant, and leads to considerable financial benefits.
World-class performance organisations report an average DSO of only 33 days,
compared to 46 days for the peer group, a full 28% differential.
Assuming a 10% cost of capital, every day outstanding on a billion dollars of
sales represents roughly $275,000 in working capital finance charges. Using this
calculation, a company with $10 billion in annual revenue would generate $35.8
million in annual savings by moving from average to world-class performance in
DSO.
Hackett’s trend data is even more revealing. While the DSO rate at typical
companies has dropped only slightly since 2002, world-class performance
organisations have lowered DSO by
World-class organisations also make accurate billing a priority and as a result
see billing error rates that are 75% lower than typical companies.
Lower errors provide clients with fewer reasons to dispute bills, a major cause
of late payments.
Other keys to reducing DSO include the establishment of a dedicated collections
function to ensure that collections are made a priority, and the use of workflow
tools to help identify, prioritise and monitor the progress of collections
activities.
As part of this report, the most effective companies often utilize customer
segmentation techniques to help analyse their customer base, payment patterns,
and the impact of individual customer segments on the bottom line.
Companies then tailor collections strategies to target more critical portions of
their customer base.
Hacket-Certified™ Invoice-to-cash practices
In addition to lowering DSO, world-class performance organisations employ an
array of proven practices to improve their overall Invoice-to-Cash operations.
World-class organisations secure tangible cash benefits by reporting a higher
percentage of credit sales collected within terms than typical companies.
Collecting credit sales within terms is the first step towards giving companies
more predictable access to the cash they need. World-class organisations also
deliver more accurate cost and pricing analysis to internal customers.
Accurate analysis translates into a greater likelihood of secured margins,
further contributing to finance business partner credentials.
Once the client has submitted its amount due in a timely fashion, world-class
companies focus on applying that cash to the correct account as quickly as
possible, almost a full day faster than typical companies.
A key to achieving this shorter cycle time is the increased use of automatic
remittance matching at world-class companies.
Looking ahead
Clearly, there is significant opportunity for CFOs to add business value with a
focus on effectiveness that results in DSO reductions.
To achieve this goal, it is important to broaden the focus of finance beyond
efficiency.
It’s not enough for CFOs to cut finance operations cost to the bone.
True business value comes from improving effectiveness, and providing strategic
improvements that help the company generate dramatic returns, such as DSO
reduction.
Likewise, it is important to understand the trade-offs involved in DSO
reduction.
Make sure you have a clear understanding of the elements required to improve DSO
and the impact of reduced DSO within the operations of a company.
This is the only way to make a truly informed and effective decision.
Finally, be prepared to bring other parts of the company on board. DSO is often
a reflection of many underlying processes, and making improvements can require
activities far beyond the reach of finance.
CEO buy-in is critical, as is being prepared to coordinate activities across
business functions. Sales, for example, will want input into new collection
techniques that will impact on customers.
If manufacturing or shipment issues are driving high DSO, they must be involved
in the strategy along with a stake in the goal attainment.
Source:
Credit Control Journal (Volume 27, No
3,
2006) |
