This is a guest post from our partner BlackLine, explaining how revenue cycle management helps businesses be more responsive to changing market conditions.
Today’s business environment is more dynamic than ever. Business leaders are focused on strategic initiatives to position their companies for long-term growth, to gain competitive advantage, and to drive shareholder value.
Top of mind for many business leaders are topics like recruiting and retaining top talent, remote work enablement, mergers and acquisitions (M&A), and digital transformation, to name a few.
As business leaders focus on making strategic decisions around these areas, accounting teams are being increasingly relied upon to provide data and insights and to serve as strategic advisors to the business.
This post is part of a series that discusses areas of focus that require active accounting input, why it matters to accounting leaders, and the risk of doing nothing.
Cash is King
The revenue cycle, or order to cash cycle, refers to the entirety of a company’s ordering system and can involve many departments — from sales and accounting to inventory and logistics. It starts the moment a customer places an order and continues through when an invoice is settled, and all activity in between is recorded and reconciled.
All eyes are on the revenue cycle. Not just because it’s an essential function in finance and usually carries the most risk, but because it is a critical part of how an organization functions. The efficiency and effectiveness of the revenue cycle has an impact beyond sales and finance, including customer experience and retention, investor decision-making, and future organizational strategy.
From an investor, net income, and EBITDA perspective, the most important part of the revenue cycle is not what is invoiced, shipped, or billed, but rather what is collected. According to a PwC report, improved working capital management could unlock $1.4 trillion globally, increasing the return on invested capital by 8.8%. Maximizing profit is the end goal, and therefore limiting write downs, closing the gap between gross and net revenue and limiting the reasons companies fail to collect are of paramount importance. Further, cash flow fuels critical business strategies from maintaining customer service to investing in new areas, and so as they say: cash is king.
The Bottom Line
There are several reasons why a company fails to collect on what they invoice, but manual processes are the biggest driver. Within the revenue cycle, Finance and Accounting is dealing with a tremendous volume of individual transactions. When there is not an automated process for handling that data at scale, the result is preventable, but unavoidable, write-offs.
MGI Research estimates that 42% of companies experience some form of revenue leakage and according to a study published by EY, on average companies can expect 1-5% of realized EBITA to leakage, causing a direct hit to the bottom line. As such, this is not just a reconciliation problem—or even just an accounting and finance problem—it’s a bottom-line issue that company leaders and investors will notice.
Given the attention on cash in the current market conditions, it is of utmost importance to take action over areas that we can control and, in doing so, position our organizations and our companies for success.
This blog post was originally published on the BlackLine blog.