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Modern Accounting: The Impact of Investing in Accounts Receivable

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This is a guest blog post from our partner BlackLine, explaining how to gain confidence cash flow.

Historically, accounts receivable (AR) has been the victim of a lack of investment from a technological perspective. Primarily, this lack of investment in AR is the result of something simple: a misunderstanding.

AR is largely regarded as a necessary but transactional back-office function and not something that creates a “value-add” for the business. Unlike the core accounting of bookkeeping, AR’s reputation is that of a kind of conveyor belt. Necessary, but low impact in the grand scheme of things. As a result, AR is the victim of fundamental misunderstandings regarding how it can be optimized—and the business impact that the right optimization can have.

When finance professionals think about how to streamline or optimize AR, typically it has been viewed as something that may be better offshored or that the ERP already handles. This is due to it being largely manual, time-consuming, and often transactional. But this simply moves the problem elsewhere, rather than solving the underlying issue.

Investing in technology that automates the accounts receivable function grants you complete visibility over the flow of cash into your business, in real-time. The data, intelligence, and real-time oversight of working capital that optimized AR offers to businesses are invaluable, for several key reasons.

Unlocking Working Capital

Applying customer payments to customer accounts quickly and accurately is the cornerstone of successful AR. However, manual processes lead to significant delays in unlocking crucial cash flow.

Money owed by customers is one of the largest assets on any balance sheet. A recent report by PwC estimated that the amount of working capital held hostage in this way is an enormous €1.2 trillion globally. According to PwC, releasing this cash would be enough for global companies to boost their capital investment by 55%, without the need to look externally for funding or put their cash flow under unnecessary pressure. With interest rates as they are right now, never mind what might be on the horizon, looking internally to find opportunities to streamline cash flow and payment processes is a no-brainer.

Let me give you an example: on average, organizations are paid on day 50-55. For a business with $500m revenue, each day is worth $2m. By automating and optimizing payment processes, businesses can potentially release a significant amount of cash into the bottom line that can then be put to work in the business.

Releasing cash from receivables is the quickest and cheapest way to more working capital, yet organizations continue to rely on manual processes which don’t provide proper visibility and tie up cash for far longer than necessary. Investing in AR frees up more working capital, which means stronger business resilience and enables more effective decision-making. Put simply, it puts much more power in your hands and leaves much less up to guesswork.

Maintaining Lasting Customer Relationships

Credit controllers used to be a lot more persistent. This was clear in the terminology they used. They looked at customers as “debtors.” This sounds more akin to something you’d read in a Dickens novel than the way a business refers to its trusted partners.

The way you treat your customers not only reflects your efficiency internally but crucially shapes perceptions, both for potential new customers and those who might be on the fence about jumping ship. Chasing a customer for a payment that was made days before, simply because you’re reliant on manual processes that don’t give you proper visibility, could reflect poorly on your organization. Aside from the wasted time and effort, receiving an erroneous demand for payment on a bad day could be the difference between a continued relationship and a swift parting of ways.

Customers provide the value for our organizations. It’s our customers that are going to support us through the tough times. A mindset shift is required here at all levels of business, including the C-suite. Customers should be treated with the same respect when they owe money as when they don’t. Investing in AR creates the visibility over customer payment behaviors that is essential to this.

The right solution can unlock decision intelligence by removing time-consuming and error-prone processes involved in preparing, transforming, and visualizing data. This lets your teams make more informed decisions around credit risk policies, collection strategies, or credit limit increases to create greater value for the business. It can help you gain visibility into customer behavior changes. This could unlock opportunities for you to work with customers to solve payment challenges before they become a major problem, or increase their line of credit and in turn, your revenue. This can improve profitability by reducing the financial risks posed by write-offs and late payments.

Creating greater visibility over real-time payments allows you to leave the war of attrition over unpaid invoices behind. This leads to a more customer-centric approach to credit, collections, and complaints that can help you to maintain good customer relationships.

Retaining Talent for a Competitive Advantage

In an increasingly competitive business environment, the ability to attract and retain top talent is crucial to business success. A recent survey commissioned by BlackLine suggests that one of the first steps finance and accounting needs to take to retain their best workers is to eliminate transactional, mundane work. More than a quarter (28%) of FP&A professionals surveyed said there weren’t opportunities to learn new skills because transactional work takes up so much time, while a similar number (26%) claimed that they had become bored of the mundane, repetitive nature of their jobs. What’s more, a quarter (26%) also claimed not to have time to focus on future career development.

It’s clear that your talent wants to spend their time adding value, regardless of function. Completing a long list of manual tasks, which could be automated, is not adding value. If 80% of your time is spent on routine tasks that can be automated, that’s 80% of your value gone before any major or strategic tasks arise. This wasted energy wastes your employees, which passes on up the chain. 

Automation frees up F&A team members to focus on strategic, more career-focused goals, ensuring their motivation and energy is spent bringing value to your business (and not someone else’s).

Don’t Let Manual Processes Decide Your Fate

Many organizations have now automated processes such as accounts payable, but the prevalence of manual processes in accounts receivable continues to pose serious health issues for businesses. The problem is that automating some processes and not others could ultimately cost you more than you bargained for. If the budget only stretches so far, it’s essential to upgrade the process that will have the biggest impact. Let me explain by way of an analogy.

Imagine you need to dig a hole somewhere in your back garden. You could do it with a shovel, but it needs to be a very large hole, so doing it that way would take a huge amount of time and exhausting effort. So, you hire a contractor with the right equipment. This gets the job done much faster and with much less effort. The problem is, you didn’t know where exactly to dig the hole to begin with and you’ve dug it in the wrong place. Now, not only do you still need to dig the hole, but you need to repair the large area of back garden that is now a building site.

Automating some FP&A processes but leaving AR up to manual processes creates a similarly traumatic scenario. Choosing to invest in accounts receivable opens up a treasure trove of intelligence and profitability that could make the difference between success or failure. When it comes to accounts receivable, investment is no longer a nice-to-have, it is now a must-have for survival.

Read more about Modern Accounting:

Modern Accounting: Driving Sustainability

Modern Accounting: Why Does Intercompany Accounting Crash Your Close?

Modern Accounting: Four Key Ways AR Automations Propel Financial Operations

This blog post was originally published on the BlackLine blog.

https://www.blackline.com/blog/investing-in-ar-essential-for-survival

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Modern Accounting: Why Does Intercompany Accounting Crash Your Close?

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This is a guest blog post from our partner BlackLine, explaining why intercompany accounting is killing your close.

It’s a fact of life that if you can’t reconcile your intercompany accounts, you can’t close your books. The goal of intercompany accounting is netting to zero across the entire company. However, as multinational companies know, that is easier said than done—especially when it comes to billing services.

Deficient processes anywhere in the intercompany chain cause delays in controllership and impact a company’s monthly, quarterly, or annual close.

The Challenges of Intercompany

Without standardized intercompany processes, the risk of problems and delays that “kill your close” is high.

Poorly executed intercompany agreements

Intercompany accounting starts with an agreement between parties acting as either a seller and/or buyer to other entities in the multinational corporation. An intercompany agreement specifies what type of products will be delivered or services will be billed. It will also include details such as who is to be invoiced, what indirect taxes apply, and may even note restrictions around getting money out of the country where the buyer entity operates. If no actual agreement is in place, or if the agreement is poorly executed, mistakes must be undone and disagreements resolved. This takes extra time.

Incorrectly booked invoices

Problems progress from there as some invoices are simply not booked correctly. Perhaps a lower-level employee new to their position inadvertently books an invoice incorrectly or in a way that is inconsistent with the intercompany agreement. When it comes time to roll up the accounting, there is a disconnect between how the entities involved in the transaction accounted for that invoice. Ultimately, late in the game, the accounting team discovers these inconsistencies and must investigate where the disconnect occurred and effect a correction. This problem is further compounded as a multitude of inconsistencies roll up through the organization increasing by both number and associated value. If these issues cannot be rectified by the end of the month or quarter, they will become costly to plug.

Lack of communication

A lack of communication and standardized processes creates problems on both sides of intercompany transactions. For example, if a seller sends an invoice to the wrong distribution list or responsible person, the invoice never gets booked. Without proof of a counterparty confirmation, of a person saying, “I agree to book this,” the risk of a delay is high.

Problems on the buyer’s side arise when invoices are not processed properly. The buyer needs to book whatever service or product they receive to the right function, to the right department. This must be done in a timely manner to minimize disruptions.

Inquiries and disputes

The expedient management of inquiries and disputes presents a final challenge. Even when intercompany invoice trafficking is efficient, the person receiving the invoice may disagree with the charges. In some cases, buyers don’t communicate that they have a dispute until an invoice is overdue, putting additional time pressure on the resolution process.

Considering how many invoice disputes happen throughout the year, it’s easy to see how a poorly executed inquiry and dispute management process can critically slow a company’s close. This is further frustrated when buyers or sellers are organized in silos managing their own entity’s books while working to keep their costs down. With this perspective, if they don’t agree to pay an invoice, it doesn’t affect their margins, targets, or KPIs. They are not concerned with how an outstanding intercompany invoice impacts the larger organization. 

Is a Shared Services Team the Answer?

These intercompany challenges often drive the creation of shared service centers or centers of excellence which are tapped to manage intercompany invoicing across the enterprise. When well-formulated, these organizations can streamline intercompany invoice management and, seeing the larger picture, should increase accuracy and timeliness. However, these teams must be more than dedicated personnel assigned to intercompany tasks. Without thoughtful process design and automation and separated from the sourcing decisions by continents and time zones, a shared services team may actually increase errors. A poorly run, poorly trained shared services team also suffers from staff turnover—exacerbating mistakes.

Pressure On the Accounting Team

For the accounting team, trying to tie up the intercompany accounts at the corporate level can be extra challenging. They must track down knowledgeable parties at the entity level that may be operating in different time zones and with different work rules and holiday schedules. They face additional stress when the accounting close deadline looms, often having to spend days and nights trying to source information and resolve issues. Often, they are forced to make unfortunate write downs when time is up. The pressure becomes worse at the end of the year when issues cannot be carried over to be resolved in the next quarter.

How to Address These Intercompany Challenges

It is important to get your intercompany process right from the start. Make it well-defined and executed so that you’re not wasting time, money, and resources. Intercompany should be a net-zero game so a good policy ensures that information is right on both sides of the transaction at every stage of the process.

To prevent intercompany from killing your close, you need to establish a global intercompany standard. It should:

  • Eliminate the silos and outline how to get things done
  • Make sure invoices are booked into the right accounts and in a timely manner
  • Specify timing—for example, dictate the last day in the month/quarter that intercompany charges must be billed
  • Improve training for the shared service center team, especially new members
  • Make entity-level staff or shared services teams tie up outstanding intercompany transactions early enough so that the business unit and corporation are completed in a timely manner
  • Give you time to reconcile

How BlackLine Can Help

BlackLine helps companies centralize the management of intercompany processes, technology, and master data to create improved tax and resource efficiency while reducing operating costs. Our solution automates intercompany accounting by translating relevant data into compliant invoices and documentation to support intercompany transactions, real-time audits, and improved transaction transparency while reducing operational costs.

The art of establishing company-wide process uniformity requires experienced intercompany pros. BlackLine has guided consistency across customer organizations improving compliance and reducing risk at some of the world’s largest corporations. Uniformity and consistency are important defense lines in any transfer pricing audit as they communicate a sense of control and defend against disorder.

Read more Modern Accounting blogs:

Modern Accounting: Four Key Ways AR Automations Propel Financial Operations

Modern Accounting: 6 Essential Qualities for Surviving the Robot Uprising in Accounting

Modern Accounting: How to Approach Intercompany Recharging

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