Order-to-Cash Strategy During & After the Pandemic

Thoughtware Article Published: Apr 21, 2021
Financial Services Money Tax

Credit-to-Cash Is Now the Top Priority 

Order-to-Cash (O2C) affects every aspect of a business operation. By making O2C a priority throughout the entire enterprise, CFOs can improve strategic decision making and profitability. 

There’s telling evidence that CFOs in manufacturing and distribution are recognizing the need to shift their primary focus from key income statement metrics to a closer examination of the balance sheet—specifically areas that directly affect working capital and cash flow. Therefore, special attention and new paradigms are being established with the Credit-to-Cash (C2C) functions, e.g., credit, billing, receivable management, late-stage collections, and cash application. The need for a 360-degree view of customers and accounts receivable (A/R) to assess and monitor credit risk and forecasting, accelerate cash flow, mitigate bad debt, and work with customers is paramount. 

Implementing smart technology to drive and track the process and results can involve a lot of time and resources—but the payoff is significant. It comes down to people, practices, and process automation. This article focuses on people and best practices that could be implemented quickly for C2C.

The Relative Value of Co-Sourcing

Now more than ever, manufacturers and distributors use outside specialists to assist with receivables, whether it be collection agencies for difficult debtors or outsourcing (either offshore or homeshore) to handle C2C functions.

Gaining the perspective of a top-notch O2C solutions professional/service provider can help unlock cost savings and improved results. The O2C provider will bring a broad set of resources and capabilities grounded in best practices and a strategic approach. A company’s noncore functions are the provider’s core capabilities; therefore, they have to be the best at it. They’ll partner and collaborate with the company’s internal team (co-sourcing) and seek to achieve peak outcomes. 

Types of Workers

In-sourcing requires retaining or adding full-time equivalent (FTE) employees to provide the expertise or manpower required for a given function, creating a fixed cost.

Outsourcing eliminates the fixed cost, but it often results in less control over the process. It resembles a call-center approach with minimal client customization.

Co-sourcing is the better alternative for discerning manufacturers and distributors. With co-sourcing, companies gain an external resource that becomes employee-like at the lowest homeshore cost possible.

Cost vs Expertise

 

C2C Best Practices That Can Be Implemented Quickly

The pandemic has caused manufacturers and distributors to look for every opportunity to reduce financial pressure and improve profit margins, cash flow, and bad debt. Here are some C2C best practices to consider:

  • Discuss and produce additional methods of consistently measuring key performance indicators (KPI) to support objectives and confirm outcomes.
  • Ensure customer master data management is accurate and accessible and can be shared across all parts of the organization and platforms. Think about technological innovations that make data management easier. Identify areas of inefficiency and errors. Have greater oversight and control over your order process.
  • Evaluate the policy on customer payment terms. Discount terms may be appealing to some customers, and the discount may well offset the risk of waiting 30 days to receive payment. In other cases, extending terms to critical, longstanding customers may be the best route for maintaining a stable relationship. New terms like these should be considered special, temporary arrangements and regularly analyzed for value.
  • Compare customer payment behaviors to their stated terms and note those with eroding margins based on the cost of capital. Consider recouping lost margin with these customers by doing a fair price increase. 
  • Develop a credit risk score for customers, e.g., high-, medium-, or low-risk, and recommend maximum credit limits for all or a segment of customers. This credit risk score forms the basis for collection best practices and credit strategy. 
  • Accelerate the billing/invoicing pace once there’s certainty and confidence the work is being performed with accuracy, including with various customer platforms and portals. Subsequently, monitor and drive the accuracy and speed of billing performance.
  • Maintain regular contact with your customers. The largest and best-paying customers receive priority customer service because problems such as missing invoice copies, pricing, delivery issues, and other requests get resolved quickly. With consistent early contact, customers learn that their payment habits are closely monitored. Customers become trained to pay sooner and look to hold cash from other vendors that aren’t watching as closely. Placing a “customer service” call on larger balances before the due date allows for resolving problems before the due date so the payment can be made within the terms. Execute a proactive customer service-based approach in all communication with customers. Customer contact should be prioritized by credit risk score/days past due, i.e., old to new/high balance to low balance, so the collection specialist performs the right steps at the right time as they consistently and systematically collect A/R throughout the designated customer base. Customers appreciate the service-based approach. They like that A/R is monitored and concerns are quickly identified and resolved.
  • The goal is to do each and every cash application transaction completely, accurately, and timely. Customers receive the utmost attention so the payment gets resolved quickly. Potential issues are quickly identified. The approach focuses on rapid identification and correct resolution of cash application transactions that slow the payment being applied. Track and report all cash application transactions. Beyond the general quantifiable reporting information, also identify possible coinciding exception issues. Work with the bank to modify the lockbox rules to increase the auto-apply hit rate.
  • A rapid assessment of the O2C functions will help identify and prioritize areas that need improvement. 

View our rapid priority assessment PDF for helpful charts to help you track functions and questions to consider.

Services

 

In Summary 

O2C is one of the most critical and complex processes of an organization, yet executives rarely pay any real attention to it. The O2C process is the collection of all activities from receiving an order through processing it and getting paid by the customer. It’s generally a complicated process that has no off-the-shelf solution. Because of the complexity, few corporations ever look to make O2C improvements until a crisis shocks them into realizing the problems and pitfalls of inefficient O2C processes. The process is transversal, cutting across many departments, including but not limited to marketing, sales, pricing, contracting, collections, warehousing, finance, and customer service. It’s often believed the process is too cumbersome and complicated to re-engineer. This is simply not the case!

The dynamics of businesses are changing rapidly, both voluntarily and involuntarily. Are you keeping up? 

For more information, reach out to your BKD Trusted Advisor™ or submit the Contact Us form below.
 

Related Thoughtware

Kate & Ben — How can we help you? Contact Us!

How can we help you?