Leveraging the Cloud to Unlock Working Capital

Having greater access to capital is a critical need for companies. Unfortunately, the amount of cash that is tied up in excess working capital is at its highest point in three years – a situation that can make it difficult for companies to continue operations and meet expenses. Companies need a way to unlock this working capital.

To meet this challenge, companies are freeing up cash "stuck" in accounts receivable (AR), which for some businesses can exceed 30% of their revenue. Understanding where and how cash becomes "stuck" is one of the most powerful tools available to CFOs. However, many companies struggle with accessing and leveraging the data that can answer these questions. The problem is that this data is often scattered among multiple ERP systems or locked within a single system that cannot address all of the company's information needs.

Traditionally, companies have turned to technology to improve performance within AR – focusing on days sales outstanding (DSO), past due percentage, reserve balances and the percentage of write-offs, as well as optimizing the cost of collections. I propose, however, that the CFO needs to take a different approach to improve AR performance – one that leverages the full spectrum of technology, increases visibility and workflow, and enables better collections strategies.

Leveraging the Cloud

A primary focus of the CFO should be to create a single system for accessing data end-to-end within the AR cycle. As a result, companies are moving toward modern cloud computing as a cheaper and more effective alternative for upgrading systems and accessing data enterprise-wide. Using cloud-based technologies can provide faster, easier access to data regardless of the ERP environment and allows application of analytics to stored data in new and more powerfully productive ways.

Cloud-based technologies can also provide flexible reporting capabilities. High productivity depends on having access to a user-friendly and flexible system of accessing data and creating reports suited to the organization's needs. As a result, the CFO should look for technology that is not "hard-coded" to deliver only a standard set of reports. The ability to create and change reports on the fly, to automatically generate reports on set schedules, and to establish firm controls for dispute management and escalation are key to stopping revenue leakage, increasing productivity and speeding payment times.

Using Analytics to Maximize Customer Data

The typical enterprise has an abundance of customer information that it struggles to analyze and convert into intelligence. Yet, in order to be effective in reducing the percentage of past dues and write-offs, the finance department must know whom to contact and when to call.

Applying data analytics can significantly improve collections performance at a lower cost by allowing companies to understand customer payment patterns in detail and shift away from low-return strategies. Such self-defeating strategies include lumping in good payers who occasionally miss a due date with habitual offenders and focusing on top customers with the highest balances due. These strategies raise customer resentment and fail to identify which customers are the most problematic.

In contrast, sophisticated statistical modeling that leverages past collections experience and secondary data can boost identification of delinquent customers five-fold. As a result, the company can craft more flexible collections strategies that drive higher revenue at lower cost, without upsetting customers.

By establishing standardized processes and tracking significant metrics, the CFO gains a powerful and low-cost means of crafting effective strategies for attaining the three primary objectives of any collections organization: to collect as much as possible, as fast as possible, at the lowest possible cost.

Improving Collections to Create Better Customer Relationships

An effective collections strategy rests on three key pillars drawn from applying analytics to the customer database: portfolio stratification, customer profiling and seriously aged receivables.

Portfolio stratification breaks the customer base into tiers based on key components such as AR balance, revenue and other parameters that are usually specific to industry, geography and customer types. This stratification determines which tier contributes the most toward the outstanding balance and collections efforts.

Once tiers are established, customer profiling identifies customer payment patterns. The best results are achieved when companies shift from collecting on highest past due balances to collecting from those customers that drive not only the highest past due balance but also demonstrate a perpetual behavior of late payments.

The CFO must then decide how to deal with seriously aged receivables. Traditionally the focus has been on accounts with the highest AR balance in the "aged" bucket. A more effective approach is to focus on the AR balance at risk of either raising reserve requirements or write-off amounts. Determining a customer's credit risk score provides insight into balance at risk and allows the CFO to set an appropriate collections strategy. Whether it includes dunning, customer calls, or a combination of approaches, the right collections strategy will be set within pre-established time frames controlled by the flow of receivables through the AR process and escalation framework.

By creating "push strategies" based on better use of customer data, the organization can not only drive changes in customer payment modes, but create its own credit risk scores and determine which products and service lines contribute higher days to collect—all invaluable in targeting collections effort and creating better cash flow.

The Key to Producing Greater Business Value

When looking for ways to improve the AR process, CFOs would be wise to evaluate underlying processes and supporting metrics, and use analytics to create more focused and effective collections strategies. Understanding whom to call and at what point in the cycle is critical. "Self payers" or those customers who seldom, if ever, require collections activities should not be lumped in with habitual offenders. The result of such targeted use of analytics can reduce the effort required to collect seriously aged invoices by as much as 50%. For one major aviation company in particular, reducing a single metric, specifically "days to pay," produced a $113MM cash flow impact. In addition, using analytics can reduce time spent on self-pay customers from 25% to less than 5%, and cut in half the 40% of collections time spent chasing the 10% of most aged AR.

CFOs today have unprecedented access to tools for gathering, storing, accessing and analyzing customer data. The key, however, to optimizing working capital lies in the finance department's ability to access that data in real time. Cloud-based technologies give users at every level unified access to data systems that help them quickly understand the status of payment and when to take action on past dues. And not just any standard, one-size-fits-all action, but appropriate, targeted activities driven by specific knowledge of the company's customers. Analytics, properly used, shape strategies and drive value across the organization from sales to collections, at lower cost, while actively promoting better customer relationships.

Keith Meyer is Genpact's Order to Cash Practice Leader for Finance & Accounting, where he's responsible for the OTC solutions, supporting operations and Genpact's thought leadership in the OTC domain. He has over 30 years experience in the OTC space. Prior to joining Genpact, he held positions at Hewlett Packard and Creditek (prior to Genpact's acquisition of Creditek).