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Ineffective order-to-cash processing make DSO levels soar and performance levels plummet. The older outstanding receivables become the more difficult they are to collect. The resulting ebb in cash flow decreases profitability and shakes shareholder confidence. Leading edge technology, service delivery models, and best practice can renew high performance hopes.

This paper examines the order-to-cash process, the symptoms of an inefficient process, and benefits that can be achieved from improving the process. It also identifies best practices related to processes, technologies, performance measurement, and service delivery models.

A world-class order-to-cash process distinguishes high performing companies. However, the order-to-cash process is frequently neglected despite its strategic importance and the increased use of shareholder value performance measurement techniques. Surveys suggest order-to-cash performance could be improved at many companies. As Paul French, executive chairman of Equitant, states: "Accounts receivables are often where customer problems go to die, through incorrect billing or bad fulfillment."

Order-to-Cash Process Overview

The order-to-cash process originates with an initial credit check on the potential customer and terminates once the customer pays for the goods or services received and the company applies the cash (Figure 1). There are six potential areas affected by the order-to-cash cycle:

• Customers
• Customer Service
• Operations
• Distribution
• Sales and Marketing
• Finance and Accounting

Since most companies are functionally managed, the order-to-cash process usually impacts multiple departments. Therefore, it is important for each department to complete its process error free and transfer correct information across functional boundaries.

Symptoms of an Ineffective Order-to-Cash Process

An ineffective order-to-cash process is symptomatic of poor cross-functional integration. For example, ineffective receivables management can be identified through higher-than-expected days sales outstanding (DSO). Process failures can occur at any of the several points within the order-to-cash process and can be summarized by:

• High order-taking error rates
• High order fulfillment error rates
• Customers unable or unwilling to pay to terms (the "can't and won't pays")
• Inefficient and ineffective collection processes
• Inadequate customer query management resolution processes

Benefits From Order-to-Cash Process Improvement

There are numerous benefits from improving the order-to-cash process. These benefits are especially important to low margin or investment intensive companies. An efficient order-to-cash process allows companies to:

• Invest capital in higher value added activities since excess outstanding receivables have a minimal return on capital invested.
• Reduce the level of external financing required. This improves profitability by lowering debt interest payments and by reducing the level of external financing required as a company's debt-equity ratio improves. This can result in an improved credit rating, which in itself can lead to lower financing charges. For every $1 billion of revenue, reducing DSO by one day can reduce borrowings and financing charges by $4 million and $240,000 respectively.
• Decrease the administrative effort and cost required to manage the collection process.
• Increase collections by decreasing DSO. Generally, older receivables are more difficult to collect, and the longer receivables remain unpaid, the higher the risk of a customer being unable to pay.

Best Practices in Processes and Technology

Best practices utilize existing and emerging technologies to automate and integrate the order-to-cash process. An automated and integrated process reduces the potential for error associated with manual processing and manual information transfer.

ERP Solutions

Integrated ERP solutions, such as SAP, Oracle, and PeopleSoft, facilitate automated data transfer across the functional areas in the order-to-cash process. For example, in an integrated ERP solution, orders from customers automatically create fulfillment and distribution scheduling based on the customer's order requirements. Once products are distributed, customer bills are automatically generated based on customer data (price, invoice address, etc.) and the general ledger is updated. This integrated processing reduces the potential for errors to occur when transferring information across functional boundaries.

However, ERP solutions do not manage customer risk, resolve potential errors that can occur in customer order processing, or manage cash collection and allocation after customer billing. Technologies and software solutions are emerging to manage these process gaps.

Credit Management

External customer data can be integrated in an ERP system to improve credit/risk management. A company can provide a customer list to D&B, which will email the company with new customer information as it becomes public knowledge. Information may include newly filed accounts, customer press releases, court judgments, or a change in payment profiles. These credit management services can help companies manage customer credit risk by forewarning about deterioration in a customers' financial position. Then, companies can manage credit risk by reducing the overall credit offered to a customer or by requiring a bank or parent company (if appropriate) guarantees for any credit offered.

Order Processing

E-ordering solutions can accelerate the order process, reduce customer internal order processing errors, and decrease administrative costs by eliminating manual processing necessary to transfer customer order requirements into internal order processing systems. Electronic data interchange (EDI) technology can manage one-to-one relationships with larger customers, or customers can use self-service ordering portals/extranets to place orders. Orders are then automatically uploaded into an ERP system. Web-enabled ordering solutions can also be configured to allow customers to maintain their own data, such as delivery address, sales tax numbers, etc.

Billing

Companies can also bill customers using EDI technology. This enables customers to upload billing data into their own systems for automated invoice processing and payment. Benefits from this best practice include cost savings related to printing and posting billing invoices to customers, faster invoice delivery to customers, and decreased risk of processing errors by the customer, resulting in more invoices being paid correctly and on time.

The National Association of Credit Management (NACM) believes that EDI technology will become more pervasive. Currently, only the largest corporations have realized significant economies of scale through EDI initiatives due to the implementation complexity and cost. Smaller companies that are involved in EDI often have done so only because a larger trading partner has given them no choice. However, increased transaction volumes, improved EDI translation software, and decreased implementation costs will make EDI more popular.

Payment Receipt and Processing

The billing and payment process can be automated using electronic bill presentment and payment (EBPP) solutions. Consolidation services companies allow businesses or consumers to pay bills to multiple companies from the same secure Web site. Payments are then automatically uploaded into the receiving company's bank account and financial ledgers.

EBPP is particularly attractive to the mass-market direct sales industries, such as telecommunications, financial services, and utilities, where billing is a large business processes and significant expense. For example, more than 200 leading U.S. billers, such as AT&T, MCI WorldCom, Sears, and Verizon, use bill consolidation services from CheckFree. The typical cost to produce and send a statement by mail is $0.90 to $1.25, compared to costs of $0.25 to $0.30 to generate and deliver an electronic bill, according to Marian Lewandowski of The Xenos Group. He adds that even greater savings are available in making payments electronically, where the average processing cost drops from $1.50 for mailing a paper-based payment to only $0.10 to pay an e-bill.¹

Bank lockbox facilities can also be used to automate payment processing. In addition, advances in optical character recognition (OCR) and magnetic ink character recognition (MICR) technologies (e.g., IXOS) are beginning to increase the potential to replace the costly and error prone system of accounts receivables (AR) clerks marking off individual invoices paid. These technologies create an automatic electronic upload to a company's financial ledgers from a scanned paper-based remittance advice.

Outstanding Receivables
Collections Management

Cash collection personnel or their supervisors traditionally identify their activities (determine customers to call, queries to resolve, nonpayments to prioritize, etc.). The prioritization of the activities is often unsystematic and suboptimal. Companies such as I-many and Get Paid offer automated receivables management workflow tools to systematically prioritize collection personnel's workload, prepare and record customer contacts, and automate customer query management. The benefits of these workflow management tools include:

• Improved business process efficiency by automating manual mundane activities.
• Increased direct customer contact leading to higher collection rates and lower overdue balances.
• Improved customer satisfaction and retention by tracking and resolving disputes more quickly. o Improved relationships, retention, and profitability from proactively communicating with key customers.
• Maximized utilization of the inquiry-handling and receivables-collection teams' time by focusing their efforts on the right accounts at the right time.
• Decreased costs by enabling customers to access their accounts via the Internet.
• Improved integration where multiple back-office systems currently exist.

Process Performance Reporting

Many companies focus on DSO to measure the effectiveness of their order-to-cash process. The finance organization is typically responsible for managing DSO, yet the cause of poor DSO performance can occur in many functional areas.

The 2001 Working Capital Survey² reports that DSO performance varies significantly across and within industries (Figure 2).

It is often argued that DSO performance is strongly influenced by external factors, including different country regulatory frameworks and payment cultures. While this is true, the variability identified in figure 2 is far too great to be solely attributed to those factors.

It is also argued that supplier power can strongly influence the customer payment terms (i.e., small suppliers that lack market power may offer extended payment terms to retain customers). Figure 3 plots sales value in millions of dollars against DSO in the food and beverage industry. It shows little correlation between a company's size and its DSO performance. Therefore, process effectiveness must be a key factor in DSO performance levels between companies.

Instead of measuring DSO, a best practice is to use a causal analysis framework to assess the relevant key performance indicators (KPI) for each step in the order-to-cash process. This involves: o Identifying the functions involved in the order-to-cash process.

• Determining the process steps required to efficiently and effectively manage the order-to-cash process for each function.
• Analyzing the existing performance of each process step.
• Assigning KPIs to measure where most process failures occur using the Pareto Principle of existing process steps.
• Measuring the performance changes in each KPI over time using statistical process control techniques (Figure 4).

Example KPIs for each step in the order-to-cash process are:

• Receive Order – Percent orders received electronically, percent customer calls taken on initial contact, percent order input errors.
• Authorize Credit – Percent bad debts, average credit approval cycle time.
• Order Fulfillment – Percent of perfect orders (i.e., percent of orders delivered to customers in full quantity at the specified time).
• Invoice Customer – Percent invoice accuracy (i.e., the accuracy of invoice production as determined by the proportion of invoices with invoice errors relative to the total number of invoices raised), percent invoices requiring manual intervention, percent invoices issued electronically.
• Cash Collection – Percent cash collected within agreed credit terms (excluding invoices subject to customer query), percent cash collected electronically.

These KPIs can be augmented by overall cross process KPIs, such as DSO and total process throughput time.

Outsourcing Elements of Order-to-Cash

Outsourcing elements of the order-to-cash process is well-established for invoice printing and posting and the sale of receivables to third parties through debt factoring. However, the best practice initiatives identified in this paper can require significant capital investment. Consequently, outsourcing back-office activities like receivables management provides an investment in and focus on the process that would otherwise be difficult for capital- or management-constrained companies to justify. Rebecca Scholl of Gartner predicts outsourcing of receivables management will grow faster than the overall F&A BPO market, which itself is expected to grow from $14.5 billion in 2000 to $38.9 billion in 2004.³ Microsoft, an early adopter of receivables outsourcing, has improved the percentage of total receivables that are current from 65 to 80 percent in 1995 to 95 percent today.

Conclusion Although the order-to-cash process is often overlooked, there are many improvement opportunities. ERP solutions automate the order-to-cash process and decrease manual effort. Emerging technologies, such as credit management solutions, order management solutions, EDI, EBPP, and automated receivables management, also can significantly improve components of the order-to-cash process. Instead of using DSO to measure the overall order-to-cash process, a best practice is to use specific KPIs to measure each step in the process. Another emerging best practice is to outsource receivables management. By adapting these best practices, companies can decrease costs, improve their credit rating, and focus efforts on more value-added activities.

Endnotes

¹ CIO Magazine, March 15, 2000.

² Ibid.

³ Wood, J., "Reaching for Receivables," CFO Europe, July/August 2001.