By implementing an automatic solution that addresses their customers’ requirements, manufacturers can realize new levels of operational efficiency while enjoying significant cost reductions.
Industrial product manufacturers face increased demands for lower costs; concurrently, they are being called upon to develop and utilize more innovative and complex products. To achieve both objectives, where should organizations look to cut costs? One answer could be found in their accounts receivable practices.
Few would disagree that many current back-office processes are not as efficient as they should be, but many do not realize the costs and risks these inefficiencies introduce to their organization and their bottom line. Consider the critical processes in accounts receivable (AR)—invoicing a customer, receiving payment from that customer, and settling the transaction within the AR system platform.
Data from APQC shows that top-performing industrial products organizations receive all of their receipts electronically or automatically—in fact, 32% of all the respondents in this industry said that they had 100% receipt automation. (“Top performers” indicates organizations with values below which 75% of all responses fall; “bottom performers” indicates the value below which 25% of organizations fall.) On the other end of the spectrum, the bottom performers receive receipts electronically or automatically only 37% of the time (Figure 1).
When APQC looked at data from all organizations, it found that a statistically significant relationship exists between the percentage of receipts received electronically or automatically and cycle time from transmission of invoice to payment. [To do this, APQC used the Pearson correlation test, which produces a coefficient that ranges from 1 to -1. The closer the coefficient is to 1 or -1, the stronger the relationship between the variables. The test also determines the statistical significance (or p value)—this represents the likelihood that it is a false correlation (meaning that the closer the p value is to zero, the less likely it is this relationship is a fluke). In this case, p = .000 and the coefficient was -2.66. ]
What this demonstrates is that as the percentage of electronic or automatic receipts goes up, the cycle time from transmission of invoice to receipt of payment can be expected to go down. Organizations that increase their percentage of automated receipt processing, then, can expect a shorter cycle time to complete this process, since electronic payments can travel at the speed of light, so to speak, while paper checks meandering through the postal system cannot possibly compete in terms of speed.
It’s not always easy for an organization to get the majority of its customers to pay electronically, but it is worthwhile to promote this method of payment. Ultimately, achieving customer-to-cash automation hinges on several considerations. Organizations must possess the ability to match electronic invoice presentment with payment and should also provide an outline of data elements necessary for the customer to post into their automated platform. They must also make supporting documentation that is necessary for invoice review available within the same platform and match the invoice details with the payment details entered by the customer as payment is made. They should then use the data to generate a detailed AR file for import into the supplier’s platform to reconcile the AP data and provide a settlement file to the buyer.
By selecting and implementing an automatic solution that best addresses their customers’ requirements, and by providing flexible payment options, industrial products organizations can realize new levels of operational efficiency while enjoying significant cost reductions.
Elizabeth Kaigh is a financial management research specialist at APQC, a nonprofit business research and benchmarking firm based in Houston.