Speeding up the Cash Cycle


By Bob Sherlock
Marketwerks, Inc.

“If cash is King, then internally-generated cash flow is Queen.”  -An Ancient Philosopher
With uncertainty about how deep and long the recession will be, and a tighter lending environment, business leaders are paying increased attention to cash on hand and cash flow.

bent-arrows-for-sherlockJust as their need to generate cash flow is greater, the environment has made it more difficult. Volume for most companies is down. Pricing is under greater pressure. Customers are becoming even more demanding of their suppliers as they seek to lower their cost of doing business. For companies selling on credit, Receivable Days Sales Outstanding are often increasing, and the credit crunch makes financing working capital more difficult and more expensive.

The news is not all bleak, however! Most companies have more power to improve results than they may think. Analytically-driven pricing and commercial process improvements can set up better outcomes:

  • Get paid more (fewer deductions/denials, better price yields)
  • Get paid faster (billing/receivable cycle)
  • Increase customer satisfaction and productivity

Getting Paid On Time and In Full

Let’s examine the root causes of delayed and incomplete receipt of payment, so we can address those factors that are within the company’s control or ability to influence. True, payment delays and denials are sometimes due to customers’ lack of cash or calculated decisions to pay slowly. But our focus here is on what you can most readily affect.

These root causes cross-functional boundaries. A few common causes:

  1. Internal processes cause invoices and statements to go out later than they might.
  2. Product/service performance gives customers plausible excuses or good reason to delay, deduct or deny.
  3. Incomplete understanding of and compliance with customer’s procurement formalities.

It’s beyond the scope of this brief article to provide a detailed “how-to” for tackling all these root causes, but let’s look at each of those in a little more detail and understand how we might improve things.

1. Internal Delays. It’s not unusual that little delays creep into our business processes, and we bill later than we could. The customer is probably not going to make up for our lost time!

workflow-for-sherlock1Have you studied and mapped out everything that has to happen for your invoices or statements to be presented on time to the customer? In professional services businesses, for example, it isn’t unusual for delays in submission of timesheets and out-of-pocket expenses to delay billing.

We recommend carefully reviewing your process; setting up a tighter, more disciplined routine; communicating the importance of every team member playing his or her part; and aligning the recognition and reward system with the crucial objective of timely and complete execution of all steps in the billing process.

2. Product/Service Performance. Any glitch, even in a little detail, can result in delays, deductions, and denials. In many industries, there are many places where things can go wrong:

  • Products and services are often configured, customized, or assorted for each order.
  • Pricing often varies by geography, by customer, and by order, and may have adjustments to cover the cost of materials, energy, and freight. There’s ample opportunity for pricing errors and discrepancies.
  • Many people inside and outside the company are involved with quoting, selling, fulfilling orders, billing and collecting.
  • The scope of services and products isn’t defined specifically enough, so there’s room for misaligned expectations and misunderstandings.

You can begin improvement efforts with reviewing invoices and statements where customers delayed, deducted, or denied payment, and digging into the reasons. The required process improvement steps often become quite apparent!

3. Mirroring the Customer. Do you thoroughly understand each major customer’s internal processes for making purchase and payment decisions? For new accounts, have you already worked through all steps in getting set up as a product or services supplier?

Delays and denials happen often when transactional matching and documentation aren’t right. Are your processes set up to accommodate the needs and requirements of each customer?

Does your customer understand how important it is for your company to be paid on time? It can be beneficial to remind them why it’s important to you, and reinforce timely payments with appreciation.

In general, the more complex the transactional environment, the more room there is for improvement. Yet even simple businesses can find ways to address root causes and do better.

Addressing the root causes when your company isn’t paid on time and in-full can pay off in multiple ways. Your company can experience faster cash flow; happier customers who will give you more business and be less price-sensitive; and better internal productivity as you eliminate labor-intensive after-the-fact corrective work.


This Post Has One Comment

  1. Adam Zak

    Excellent information. And both deeply rooted in, and proven by, over 50+ years of operational excellence experience based on principles and practices of the Toyota Production System, more commonly known in the US as Lean Thinking.

    Jim Womack and Dan Jones first introduced Lean concepts in their book “The Machine That Changed The World,” and then followed-up with a second excellent book aptly titled “Lean Thinking.”

    No executive in any business function in any industry can afford NOT to be conversant in and supportive of these concepts and principles. Lean is about putting the customer first and delivering customer value in every product or service you provide. Now that’s the magic formula for making cash flow!

    Adam Zak, http://twitter.com/LeanThinker

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