Best Practices in Business Performance: Tuning Cash Flow Management in ERP Systems

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Weathering the financial liquidity crisis of the past few years has reinforced for many financial executives an important maxim – don’t underestimate the role cash plays in the organization.  What’s more, it has finally shifted the curtain to shine some light on some badly neglected processes that directly impact cash.  These near-cash processes can be optimized to improve business performance, but the focus must be on process, not technology.

What are “Near Cash” Processes?

The old axiom, “change is constant,” is absolutely true. For high-performance finance organizations, this adage underscores the need to be flexible and adaptable to varying economic and environmental conditions. Optimizing financial processes, especially near-cash processes like accounts payable (AP) and accounts receivable (AR), can help companies achieve this adaptability. The trick, of course, is getting the project right.

AR cash conversion cycle (CCC) represent those amounts owed by customers.  Efficient and quick turn-over of AR is critical to the operating cash flows of the organization. Cash to AP is those amounts that we owe to our suppliers.  Paying and being paid, according to agreed upon payment terms is critical for reliable cash flows and satisfactory business partner relations.  The processes by which we account for these transactions – entering data, clearing open items and dealing with exceptions – all directly impact our levels of efficiency and productivity.

What determines Near Cash optimization?

There are some fundamental truths about optimizing AR and AP business processes:

  1. Financial executives want low cost and high quality performance from all organizational functions.
  2. Cash is king.  In some organizations, cash is a miserable dictator.
  3. AR and AP processes are critically important to the organization – perhaps even strategic – as emphasis on cash flow would indicate. (See point 2 above).
  4. Organizations are notoriously slow to invest in ‘back office’ optimization, unless there is real pain felt at an executive level or the strategic value is proven.

Many performance issues with AR and AP revolve around tasks undertaken every day because organizations are unaware of a better way.  Non-value added tasks such as manual keying, over-reliance on paper, opaqueness of email correspondence and the multitude of hand-offs will perpetuate themselves unless diligently rooted out.  This redundant work adds bureaucracy, increases error rates, and introduces latency into the process.  Such wasteful and inefficient tasks have the real ability to increase overall cost structure, compromise cash flow, and lead to dissatisfaction within important customer and vendor business partner relationships.

Opportunities in Accounts Receivable

As payment media continues to evolve, paper checks are quickly becoming a thing of the past.  Biller Direct processing is increasing while ACH payments swell email boxes with more manual remittance advices.  Unfortunately, remittance processing is shifting from the bank to cash application teams.  These shifts may necessitate increasing staff, but hiring freezes can prevent  supplementing teams.  Meanwhile, customer payment variances continue to grow in complexity and volume.

Solutions for AR can automate the capture of remittance data, provide instant visibility to critical sales-related documents, and streamline discrepancy management processes. Intelligent workflow accelerates routing of exceptions with automated tracking and reminders. By seamlessly integrating with an ERP system, visibility to payment documents can increase because the remittance image can be attached to the clearing document in the system. This saves valuable time over accessing bank’s website or CD.

Opportunities in Accounts Payable

Supplier invoices arrive in all sorts of shapes and sizes.  Via paper, fax or email, the data still needs to be entered into the system.  Matching against purchase orders and deliveries takes time, and routing for approvals or other exception handling can be time-consuming.  In the process, early pay discounts are missed, or worse, taken well past the discount date.  This all leads to excess cost and supplier ill-will.

Streamlining the process with intelligent business-rule determination and routing, automated data capture, and transparency into the entire process should be a priority.  Typical results are a reduction in errors, enhanced opportunities to take discounts, a faster invoice-to-pay process, and improved vendor relationships. In addition, companies can reap costs savings and with insight into the process, are able to base decisions on real-time information.

Start down the road to realizing benefits

Benefits for both AR and AP include driving business performance improvement to decrease cycle time and increase efficiencies enabling better control of finances. Such solutions also bring continuous process improvements including cost savings, improved cash flows and the mitigation of risk.

About Brian Shannon 1 Article
As Dolphin’s Principal Business Process Management Strategist, Mr. Shannon is focused on business processes and financial solutions to maximize return on investment. He has more than 16 years of SAP experience and his background includes thought leadership, knowledge management, project management, training and SAP consulting with extensive experience in the automotive and manufacturing sectors as well as oil and gas, retail and utility verticals. Mr. Shannon’s industry and finance experience includes positions as a National Credit Manager, International Finance Manager, Corporate Banking Credit Analyst and Financial Strategist. He earned a Bachelor of Arts degree in Political Science from the University of Manitoba, and an MBA in International Finance from the University of South Florida.

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