Intro

Order to Cash Improvement

Accounts receivable is typically viewed as something the accountants control somewhere in the back office. If the day's sales outstanding (accounts receivable cycle time) is high, the focus is directed toward the collection process and billing. The reality of the situation is that the receipt of cash on a timely basis from a customer is the ultimate test of virtually all the processes of the company from the design of the product, the manner in which the product is positioned by the salesman, the taking and entering of the order, the manufacturing and shipment of the product, the installation of the product and the billing and collection process.

The Boulder Group understands that to successfully drive significant improvements in the order to cash process requires a cross functional approach including all the processes depicted in Figure 1 below. We can assist you in establishing an improvement process to streamline your order to cash process. The result is improved customer responsiveness and on average a 20% reduction in accounts receivable.

Accounts Receivable Assessment

An overall assessment of the general characteristics of a company's accounts receivable can be achieved at a macro level by analyzing certain data and reviewing the key sub processes in the order to cash process.

Macro Process Map

Order to Cash Process

The cross functional team must focus on the entire order to cash process which is depicted in Figure 1. This is the process from the point the salesman takes the order until the payment for the goods service is received by the accounting department.

The order to cash process generally consists of six sub processes. These processes should mapped and the key policies and process metrics understood. The key sub processes to improving accounts receivable typically are the order entry process and the collection process. In analyzing collection problems, the root cause of approximately 50% of the problems will occur in the order entry system.

The collection process is the second key process. The key to world class collection processes is consistency. The process has to react to the same set of circumstances in the same manner and in the same timeframe every month. The system must be consistent from month to month to month.

Measurements

The measurements that are most important to driving results in accounts receivable include order entry first pass yield, order entry cycle time, sales credits as a percent of revenue, sales credit cycle time, shipment linearity, account aging, billing cycle time.

The performance measures to determine the progress include accounts receivable as a percentage of revenue and days sales outstanding.

Barrier Identification

The mapping and analysis of the order to cash sub processes will identify barriers. The team will prioritize the barriers identified and begin working the high impact barriers. Data collection activity will be started in parallel to confirm the barriers identified to date, discover additional barriers and define more clearly the root cause of barriers identified. The priority of barriers to attack can be established by assessing the potential impact vs. the difficulty to remove.

Team Structure

The optimal team structure to reach entitlement in the order to cash process is to view the total process as starting at order acceptance by the salesperson and is complete upon collection of the cash (Figure 1). The team focus should be the entire process and include representatives from sales, operations, order entry, credit/collection and accounting. Additional barrier removal teams would be added as root cause barrier identification progresses.

Why customers do not pay?

The majority of collection problems are not collection problems. The customers that do not pay their bills due to cash flow problems range from 20-30% of the overdue accounts. The vast majority of accounts that are past due are not yet satisfied with the execution of their order. The credit department is simply a facilitator in solving customer's problems so that they achieve their collection goals. The road to accounts receivable goals is taking those same customer problems and instead of fixing the problem, fixing the root cause process that is creating the problem.

Summary

Accounts receivable performance is a window to the effectiveness of the total revenue process of a company. Mediocre days sales outstanding indicate that the company's revenue process; from the point the salesman takes the order to cash collection does not function as an effective seamless process.

In this economic climate, companies realize that by freeing up cash they create opportunities to insulate themselves from economic fluctuations. In addition, customer satisfaction will increase…a paying customer is generally a satisfied customer!