Analysis

Finding New Control in Accounts Receivable

Simon Shorthose

Biography
Simon Shorthose joined ReadSoft UK as Managing Director in 2009.

Simon Shorthose
Managing Director
ReadSoft

Simon has a leadership background in sales and marketing business management

with strong direct and channel sales experience in the IT industry. In a career
spanning 20 years, he has held senior positions at ERP software house IBS Europe
(Vice President Sales Europe), IBS Automotive (VP sales EMEA), IBS UK (Managing
Director), at US software company Catalyst International (VP Sales & marketing
EMEA), Isotrak (Business development Director), Hays PLC (Sales & Marketing
Director) as well as at Ocean Group (now DHL) in a number of commercial roles.

Keywords Accounts Receivable, Days Sales Outstanding (DSO), Unallocated cash, Automation
Paper type Opinion

Abstract
Gaining control of Accounts Receivable (AR) is crucial because it enables a
business to reasonably state its assets and net income. These need to be
closely controlled otherwise a companys value is threatened as inefficiencies
impact the bottom line and seriously affect viability for future growth.

Introduction
For AR functions, month end can be a time to dread, typically requiring
additional staff be reallocated from other business critical functions. Overall, a
sales ledger should be as clean and as accurate as possible; after all it is the
record of what is owed, by whom and when it is due for payment. The problem
is there are often no targets around the quality of the sales ledger, the number of
queries resolved, or the reduction of costs.
When assessing a companys position in terms of AR, Days Sales Outstanding
(DSO) is a good barometer for the likelihood of bad debt provision, and any
unallocated cash more than seven days old is a sure sign of poor control.
So what changes can be made to the way credit with customers is managed and
controlled to deliver a more effective business?
Influencing customer payment behavior
First and foremost, it is about understanding customer payment behavior
particularly how and when customers pay. This can be greatly influenced by the
way the credit control department operates, keeping AR under control does not

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Analysis

have to be an overwhelming chore, and it certainly should not lead to barriers

between a business and its suppliers or customers. On the contrary, clearly
articulated policies can lead to better and more profitable relationships. By
establishing a few straightforward procedures, you can help ensure that your AR
does not spin out of control and you keep that all-important cash flow coming
steadily through the door.
Set standards early for billing and collections, and before providing services or
products start with clear engagement documentation as this establishes
procedural ground rules and payment parameters.
Instigate clear, preestablished formats for documentation, this helps to reduce mistakes, and avoid
delays in payment. Customers will find it much harder to dispute bills or avoid
payments altogether if you have established clear expectations and procedures
up front.
It really is important to make every endeavor to build strong, regular
communication throughout your customer/supplier engagements. Establishing
trust and mutual respect is a sure fire way to ensure that they will pay bills as
promptly as possible. For this reason controlling the paperwork which allows
staff to stay on top of payment status is crucial, the worst thing that can happen
to an AR function is for unpaid bills to accumulate, bogging down staff and
forcing them to chase rather than positively engage with customers. Such
chasing of payment also has a wider negative impact upon other departments,
especially if poor visibility means a payment has been made, but not allocated
correctly. That can have a truly detrimental effect if for instance sales have to
start customer meetings with, finance has put you on stop and asked to chase
your overdue payment, especially if the customer is not in the wrong. Only by
chasing true outstanding balances can the AR team improve DSO, reduce
queries and create more positive customer relationships that do not damage
long term sales.
Centralizing information on the day-to-day status of accounts helps Credit
Controllers gain the edge they need when dealing with customers when
payments fall past due. Credit Controllers must have clear sight of the billing
process, they need to be familiar with how paid and unpaid receivable records
are kept and have ready access to copies of unpaid accounts. Having relevant
information to hand is a powerful way to improve efficiency within an AR
department, but the most useful metrics can often go unmeasured and
uncontrolled.
Reading payment patterns
Having access to metrics means it becomes easier to analyze and understand
payment patterns and trends, and then align your systems and process with
those of your customers. If a customer is paying beyond terms, are there
patterns emerging that could have been detected earlier? Like your own
organization, customers will have their own behaviors. But this does not mean
just letting customers pay when they want.

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Such a behavior-led approach can save money through reduced credit

management costs and can also improve cash received. It focuses time and
effort into debtor analysis and makes credit management a scalable function
rather than a fixed cost. By removing the noise associated with unmatched
credits it should be possible to bring an end to the administrative activity that
detracts from the real job: to manage credit limits and collect overdue cash. So
putting straightforward metrics in place is a really powerful tool that helps the AR
team to better understand issues.
If the finance organization is understood as a series of processes, then it
becomes possible to monitor the costs of each transaction. This helps to
appreciate the value that each of these processes adds, and whether there is a
more efficient approach. The vast majority of these finance processes can now
be simply and effectively automated, providing a stable and reliable set of
metrics, regardless of the day of the month.
Automating the AR function
One of the most effective means of automation is though intelligent document
scanning and workflow processing. System automation can halve the cost of
cash allocation per invoice and deliver greater levels of control than previously
available. Unlike the traditional manual process which is almost impossible to
performance manage; an automated process constantly updates the number of
receipts remaining unallocated and their status, meaning the management cost
per invoice becomes instantly identifiable.
With every transaction recorded to identify the user and the action carried
out an electronic audit trail will trace a receipt to allocation or an allocation to
receipt. Every receipt generated can have a status assigned during the lifecycle,
enabling the user/management to identify where receipts are in the process and
to log queries against them, effectively ending the need for chase the payee
notes.
Automating unallocated cash through a system driven approach improves the
ease of matching and the visibility of where receipts are currently allocated. This
helps to provide a greater accuracy to allocation of funds and in many cases,
more than 98% of receipts are allocated to invoice first time. This then enables
credit control personnel to focus on a very small number of queries, ensuring
that these are dealt with quickly and efficiently, vastly improving the cash
position of a company.

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