Rakesh runs a research consultancy firm in Mumbai, and deals with some of the biggest Fortune 500 organizations all over the world. They also work pro bono with NGOs and SMEs in India, helping them conduct impact analysis of different projects and campaigns.
They get paid in different currencies, through different modes of payments. NGOs prefer to pay by cheque, while others may prefer international wire transfers or Paypal. Because of strict authorization and disbursement processes, sometimes his bigger clients delay invoices by even as much as three months. Some of their smaller clients find it easier to pay in installments, corresponding with different milestones in the project.
Their accounts team earlier consisted of 4 full time resources, with total cost to company being Rs. 350,000 a month. One followed up with clients for delayed payments, while another was responsible for reconciling different payments with different invoices and accounts, another was responsible for handling integration with their ERP systems and providing analytics to the CFO.
Once they integrated an AR management solution with their ERP, their reconciliation and reminders to clients were automated with just a few clicks, and getting analytics became a piece of cake. The team was cut down to two members: the CFO and an assistant Finance manager, to oversee the entire process top to bottom. This move ended up saving the company Rs. 25,00,000 a year.
Rakesh’s story is not unique. According to a study, right at this moment, some 7–12% of combined revenue in working capital is “stuck” somewhere in inefficient ITC processes at global organizations. This translated to over US $1–2 trillion lying idle, and not being used to further business goals. In fact, while most companies spend 25% of their effort on collecting from customers; best-in-class businesses spend less than 5%. They identify and classify different risk-class of customers and treat them differently, focusing their resources on truly problematic accounts.
This difference in effort arises because smart companies know how to take care of AR issues, which may present themselves in any of the following forms:
- Most of the ERPs require bank transaction documents along with other supporting documents to match invoices and deductions. The documents have to be manually uploaded in the system and must match the ERP’s format.
- The Finance & Accounting team has to manually track bank statements and the corresponding invoices to find out which invoice belongs to which client.
- The sales and finance team need to be on the same page to ensure efficiencies: there is a need to match invoices, transactions, and deductions of their clients. This time-consuming process can also often be in inaccurate. Techniques such as FIFO might backfire if a dispute arises and it also becomes a hassle for the staff to identify which amount corresponds to which invoice in most of the cases.
- Since the payment advice is processed manually, it becomes essential for the finance and accounting team to manage reconciliations on a regular basis.
When analyzed further, these challenges can be traced to several root causes:
- Decentralized, informal, and manual processes coupled with high volumes of transactions. According to a study, with the exception of only 13% of organizations that use automation and third party software solutions to manage AR reconciliations, a large number of organizations manage their AR processes manually using internal tools.
- Unclear analytics, and not enough focus on crunching available data to capture clear key performance indicators
- There is often a dearth of important information vital to identify key metrics, issues, risks, and actions
- Resource restrictions that prevent growth due to lack of necessary staff
It is important for finance professionals to look into a complete rehaul of their finance systems, to remove these inefficiencies and bring in automation.
Let’s talk about reconciliation, for example.
To handle a profitable business, you need to know your cash balances, as well as the amount of cash you can expect in the next 1-2 months. The accounts receivables balance in your accounting software is often inaccurate — clients rarely pay on time, and other issues often come into play: a cheque that was recorded as “received” but didn’t make it to the bank, or partial payments applied against different invoices or customer accounts.
Even if this process takes place correctly, mistakes are made at the time of reconciliation, where outdated tools such as spreadsheets are used, and finance personnel manually enter the balances to be reconciled.
Managers usually follow up and track progress on outstanding receivables through emails or make phone calls. Because of the inherent challenging nature of tracking account reconciliations, organizations usually prepare and review most reconciliations on a parallel schedule, without factoring in risk when determining frequency and due dates.
So, how can you overcome these challenges and eliminate efficiency to improve cash flows?
Start with minimizing manual intervention slowly, with the aim to eliminate it entirely in the reconciliation process.
Incorporating automation and machine learning in the system will eliminate the possibility of errors. You can also rely on third party tools to make your reconciliation process seamless and hassle-free.
Numberz, for example, combines the best of ERP & banking solutions, and boosts your collections process – by enhancing three critical areas: Process Automation, Client Incentives, and Team Coordination. All this is delivered via simple, secure online platform that is powered by robust banking platforms.
Some of its key features include:
- Handling a variety of relevant financial data: bank statements, lockboxes, remittance advice, credit card details, and cash collections.
- Brings immediate quantifiable benefits for automatic matching reduces manual post processing efforts.
- Managing complex international B2B transactions
- Empowering the company’s key users in terms of visibility and control.
- Showcasing performance metrics and guidance for better results (with no or limited dependency on IT).
- Supporting an auditable and compliant process.
- Delivers management reporting facilities (bird’s eye view of total invoices outstanding, accounts not reconciled, or open unresolved issues)
- Leverages the investment in ERP: seamless integration between the general ledger and potential sub-ledgers.
If you’ve ever woken up from a nightmare where your account balance runs in the red, but the bills keep piling up, speak to us.
Numberz began with one single question: How do we make sure our customers never run out of money?
Get in touch with us to find the answer. Drop us an email at email@example.com or click here.