How Finance Masters Collect Their Money
Anders Liu-Lindberg
Leading advisor to senior Finance and FP&A leaders on creating impact through business partnering | Interim | VP Finance | Business Finance
This article is co-written by Bandhu P. Das and Anders Liu-Lindberg
Despite everything that goes on in the world and the rapid change we see before our eyes every day there’s one thing we can still count on…
“CASH IS STILL KING!”
Now the term cash itself might have changed so whether you’re dealing in Benjamin Franklins (a USD 100 note in case you’re in doubt), cryptocurrencies like Bitcoin or physical goods you still need to not only get paid for your services but also collect what you get paid. In this week’s, Finance Master series article, we set out to explore how Finance Masters manage their Order-to-Cash (OTC) process. For this article, I have partnered with Bandhu P. Das, Head of Cash Management for the UK government, where he is responsible for advising on all aspects of cash management issues from complex space programs and defense contracts to day to day running of approx. ￡600bn public expenditure programs, both in the UK and overseas.
It should be simple – I provide a service or some goods and you pay…
…but we all know that it’s far from simple. Despite the best intentions there are still many things that can go wrong in this seemingly simple process like…
- …the invoice was wrong
- …the customer went bankrupt
- …the customer exceeded the credit limit
- …the customer’s invoices are overdue
- …the customer doesn’t agree to what you say you have delivered
There are many more things that can go wrong and we encourage you to add them in the comment field below and we can update the list. Nonetheless, the good news is that there are also many things you can do to improve your cash collection. Often it also depends on who dictates the process i.e. the buyer or the seller. As a seller if your bargaining position is weak it means that you might be forced to accept various clauses and complicated contract setups that makes invoicing difficult. You might also need to upload invoices into the customers’ accounts payable work flow tool which is another manual process that risk delaying your collections.
Best practices for collecting your money
Regardless, Finance Masters deal with all these issues too so let’s look at some the tools they use to stay on top of their collections.
- There is a single source of the truth for transactional OTC reporting
- Reporting is updated in real-time so that the latest information is always available to the credit teams
- Predictive analytics are deployed to generate insights related to customers and collection targets such as payments made on time etc.
- The appropriate history of data is retained electronically to support operational and analytical activity
- Self-service reporting can be performed using desktop, mobile and tablets
- Dashboards are available for customer account details, dunning history, dispute history, balances, collection activities and transaction overview/details
- Dashboards are updated real time to show progress against collections targets
In other words, it’s about transparency into performance of the process as designing the process itself is simple. If your collectors follow the process, it’s straightforward (although not necessarily easy) to escalate any given situation.
What does the King of Collectors do?
The true OTC masters are not just content about the result but look at each process step to see how they can optimize their collections process. Below gives a more comprehensive overview of KPIs you can use to monitor the performance of each process step.
Arguably, it can seem like a significant monitoring process you need to have in place but there’s none of this that can’t be built into dashboards, automated, and made available in real time. If you establish certain thresholds you should automatically receive a warning flag when you need to act. It’s now clear that Finance Masters set themselves up for success when it comes to collecting their money. They don’t wait for a situation to arise before they act. They set a process, follow it, monitor it and act at exactly the right time. Simple, right?
You're the Master and your input is needed!
The Finance Master series is looking for your input as well. What advice do you have when it comes to Order-to-Cash? What good practices would you recommend as a collector or the customer being asked to pay? What improvement initiatives have you taken to improve your collections? We encourage you to add it all in the commentary field and Anders will update the article as they tick in. If you disagree to some of the statements in this article what would you do instead? Finally, if you want to be a part of the Finance Master series then send Anders a message or write in the comment section with a topic you think you master.
Reader tip from Mike Haile: A couple of days after you send the invoice (and way before it's due) give the client a "courtesy call" to make sure that they have received it and inquire if there are any problems. It means that any possible issues are resolved before it's due and gives the client a lot less excuses for not paying it on time.
Reader tip from Emerson Galfo: CUSTOMER SELECTION is the most important part of the process. The A/R process begins in the decision on who to give credit to.
Reader tip from Tracey Boutot: Employ the "future aging", i.e. what's coming due during the next close cycle and confirm timely payments/invoice status with largest balance customers to identify and clear problems before they are ever late. This helps to maintain control of current AR so you can focus on cleanup of past due. As customers get used to the approach, all those KPI measures will reflect improvements.
Reader tip from Martin Buckle: Unlike most areas of finance, OTC is customer-facing and requires different soft skills than those required for your IFRS accounting expert or your Accounts Payable team. If a customer isn't paying because of a problem your company created (wrong values, wrong terms etc) the last thing you want is to jeopardize that relationship with an inappropriate collection call. Make sure your OTC team have the people skills to represent your brand at all times.
This is the third installment in the new Finance Master series and you can read the kick-off article here and previous installments below. Let us know what you think of it by liking, commenting and sharing so we can spread the Finance Master message to all finance professionals. You can follow Anders on Twitter for continuous updates about what’s happening in the finance function.
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Anders encourages you to take a tour of his old posts on finance transformation and not least “Introducing The Finance Transformation Nine Box” which is really the starting point for the transformation. Finally, you should join the Finance Business Partner Forum where we will continue to discuss this topic.
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Anders Liu-Lindberg is the Head of Global Finance PMO for Maersk Transport & Logistics and is working with the transformation of Finance and business daily. I have participated in several transformation processes such as a (business) finance transformation at Maersk Line, going Beyond Budgeting at Maersk Drilling and transformed a finance team from Bean-counters to Business Partners. I would love the chance to collaborate with you on your own transformation processes to help you stay out of disruption. Don’t be shy! Let’s get in touch and start helping each other.
Consultant Chief Finance Officer at Rockson Engineering Company Limited(In Receivership) for (AMCON)
6 年To have a good Days Sales Outstanding (DSO) you require to have a top notch OTC process. Some will call it Opportunity to Cash, to some it is Order to Cash processes. I will usually recommend the? Opportunity to Cash as it appears more elaborate and will encompass Contract appraisasl, negotiation and agreement of terms. Credit Appraisal and credit limit setting. It also encompasses the process of attending to customers request and ensuring that customer satisfaction is met in terms of delivery time, quality of services etc. In teaching OTC classes, I usually emphasize that happy Customers most times pay faster than unsatisfied customers.? This is a simple fact! The operation folks should be made aware of this, it is not just to back load equipment from Customers location that indicates the competition of the services. The cash must be in the Bank for all of us to say Hi-five! ?For the Team negotiating the contracts please ensure you also take into account the payment terms and agreed invoicing arrangements. Terms agreed as Invoice to be submitted a month after job completion or month end Invoicing is not good enough. Milestone invoicing or invoicing on job completion will always be better for a company watching its DSO. This is where organisations get good mileage from a good CFO. As CFO, be part of the contract negotiation process and sign off on the approval template to ensure your cash collection timing will be good. If you get it wrong from the contract stage, it will be difficult to get the "Cash is King" situation alright. Invoicing, Invoicing delivery, follow up process will assist you get a better DSO.??
Impacting Treasury, AP, AR and Finance Professionals for over 15 Years, Personality, Passion, Subject Matter Expert, Surveys, Whitepapers, Marketing Influencer, Stand-Up Comic, Solopreneur
7 年Technology is finally offering functionality that is game changing relative to cash application. AI is making its way into cash application, an application like that offered by High Radius. Also, AP automation solutions now include supplier portals which facilitate alignment in terms of what is owned, discounts available, etc. A discussion of the role of technology in OTC would be compelling.
Finance and Transformation Director | PE-Backed Professional & Business Services
7 年Nice overview of the OTC function. My two cents worth... - Classify customers into 'can't pay' and 'won't pay' - a high performing credit department will filter out the 'can't pays' before any trading starts, and the focus on the 'won't pays' will be to ensure that the customers' processes are followed so that they do not have an excuse not to pay - You mentioned DSO as a [lagging] indicator. Adding to Tracey Boutot's point, you can calculate a best possible DSO, which is calculated on the assumption that all invoices are paid on time - The best measure of effectiveness of an OTC function is the percentage of overdue invoices which are under query. The higher this percentage, the more in control the OTC function is - Finally, when it comes to reporting all of this, think about how to present it. Printing a lot of statistics is likely to get lost on the reader who will typically have a short attention span. I would structure the reporting packs based on the actions that we want the key stakeholders to take - if you can't make a decision on it, don't include it. This way, your reports will be relevant and to the point
Treasury - Corporate Finance - Personnel - Governance
7 年Hi Anders, Great stuff as always. One point I would add is on the personnel side: unlike most areas of finance, OTC is customer facing and requires different soft skills than those required for your IFRS accounting expert or your Accounts Payable team. If a customer isn't paying because of a problem your company created (wrong values, wrong terms etc) the last thing you want is to jeopardise that relationship with an inappropriate collections call. Make sure your OTC team have the people skills to represent your brand at all times. Keep up the good work.
Great article