Cash Management Takes Centre Stage at the Aberdeen Group

Even in the face of a more positive economic outlook for CFOs, the dominant driver for companies in 2010 has been the shortage of credit and the less stable economy. Faced with uncertainties and a contraction of available credit, cash management, and the need to gain greater visibility and control over cash and liquidity, has become the priority of CFOs as companies search for internal sources of financing to support business operations. Indeed, focus on cash management increased over the past 12 months for the majority of companies (83%) surveyed, and for more than half (52%), this was a significant shift.

Focus on accounts receivable

Against the background of a weak financial sector, finance executives are focused on bolstering the balance sheet by maximising cash flow. The study used three metrics as part of the assessment of operational cash performance:

• days sales outstanding (DSO) – a measure of the receivable collections efficiency

• days payables outstanding (DPO) – a measure of a company’s average payable period

• cash flow forecast accuracy – a measure of variance in cash flow forecast.

Traditionally, companies have tried to collect payments early and ‘stretch’ their payables. Aberdeen research indicates leading companies are achieving DSO of 21 days (see table, right). While the downward movements of DSO of high-performing companies reflect how credit-collection processes have become more efficient, it suggests that it may be partly ascribed to shorter accounts receivable cycles from improved technology, as well as tightening of credit terms with customers.

A critical factor that has played a role in driving prompter payments has been a rise in counterparty risk concerns. Finance executives have increasingly placed greater emphasis on customer credit risk assessment and scrutinising delinquent and overdue accounts. With many customers, especially in the retail sector, struggling during the recent economic downturn, sellers have begun to revise their customer terms and demand faster payment or even pre-payment for their goods and services.

While Aberdeen’s findings confirm that top performers collect cash faster and have a higher degree of forecast accuracy, the results disprove that the best-in-class (the top 20% performing companies) delay payment as long as possible. Instead, those with low DSO also paid invoices more promptly, minimising late payment fees and lost discounts. Likewise, Aberdeen revised its assumptions and used two key performance criteria to distinguish the best-in-class from industry average and Laggard organisations: DSO and cash flow forecast accuracy. DPO, the third metric listed the table is provided as a point of reference only, and was not used as a component of the best-in-class criteria.

Although the prevailing cash flow strategy has been to extend payment cycles and earn interest off the float, this practice has become less common. With the financial stress on sellers and today’s low interest bearing short-term investments, DPO is a metric that is less in the control of companies and more likely to be dictated by the demands of the supplier payment terms.

Also of note, increasing DPO damages trust with suppliers, discourages favorable pricing and affects suppliers’ working capital, which in turn increases vulnerability if key suppliers are no longer in a position to play their part in a company’s supply chain.

If cash flow cannot be optimised by extending DPOs, the focus should be on collecting cash as rapidly and efficiently as possible. Indeed, 53% of companies surveyed selected accounts receivable as providing the most opportunity to positively impact their cash position.

Efficiency gains with electronic payments

Contributing to shorter DSOs of top performing companies is technology. With electronification, there are elements of liquidity management, such as speed of payment that companies enable credit and customer service managers to shorten the accounts receivable cycle.

Best-performing companies use a high percentage of electronic payments (such as ACH, commercial cards, and wire transfers) to accelerate cash collection than their peers. Sellers benefit from reducing their DSO and collections costs.

Conversely, by speeding payables, companies are able to take advantage of early payment discounts or dynamic discounting to negotiate lower prices with their suppliers.

Electronic payments can be further enhanced by solutions such as electronic invoice presentment and payment (EIPP), or employing data standard formats such as financial electronic data interchange (EDI) and XML that enable electronic processing.

With automation of business processes via digital invoices, EDI and XML bring lower processing costs, improve cash flow management, and build better customer relationships. Furthermore, Best-in-Class organisations are more likely to utilise EIPP (53%), XML (73%) and financial EDI (13%) than their peers.

An important development in cash management in Europe is SEPA, the single euro payment area. The harmonisation of payments with SEPA has the potential for corporate companies to benefit from more competitive price levels and to drive efficiencies in payment processes.

However, despite the potential gains, less than 20% of global companies with a presence in Europe have adopted SEPA credit transfer and/or SEPA direct debit.

Technology automation drives value

As companies are tasked to do more with less, they are also leveraging technology in pursuit of enhanced business performance. With the weakened economy and shortage of credit, a primary objective of the corporate treasury and finance function is real-time visibility and control of cash flows to accurately forecast requirements, ensure liquidity and optimise the use of cash by investing it appropriately.

However, few companies are fully automated in the consolidation of their cash management data. Straight through processing (STP) of payments that eliminates manual intervention and automates cash inflows and outflows is elusive to even top performing companies. Only 44% of leading corporations have achieved STP, with the others achieving 26%.

Best-in-class companies are therefore 69% more likely to have STP than their peers, further enhanced by automated procure-topay and order-to-cash processes. Best-inclass organisations are 48% more likely to automate procure-to-pay with enterprise applications and 105% more likely to automate order-to-cash with enterprise applications than those that have not reached this level of performance. The majority of finance executives still rely on drawing data from multiple sources, which often entails time-consuming, manual processes that increase the potential for error.

Top performers earn best-in-class status

The manual processes also exacerbate another issue: companies are dealing with hundreds of bank accounts across the globe and with multiple banks. Further complicating issues are a lack of common standards, consistent interfaces, and integrated process flows between participants, resulting in process fragmentation, diminished efficiency and obstructions to enterprise-wide visibility and control.

With automatic reconciliation of bank accounts, interoperability across all banks websites and financial systems, and automated reporting on cash held and forecasted, organisations can gain real-time visibility into their global cash position to ensure liquidity and optimise the use of cash in appropriate investments. In practice, only 24% of leading companies have fully automated reporting of cash held and forecasted, and 26% of top performing enterprises have achieved interoperability across all banks’ websites and financial systems. Although more companies have automatic reconciliation of bank accounts, the best-in-class are 88% more likely to have this capability than their peers.

However, maintaining multiple banking partners, each with proprietary connections and/or systems to send, receive and access banking information can be cost prohibitive and time consuming. Equally important is a safe, secure and reusable single point of access to all banking partners, using standardised message and file formats, for integration with a treasury management system or enterprise resource planning system. Of the best-in-class companies, 29% have adopted SWIFT (Society for Worldwide Interbank Financial Telecommunication) to connect to banks through one platform, in contrast to just 18% of laggard companies.

Whether it’s funding daily operations, deleveraging schemes, or investing for the future, the monetary needs of companies continue to grow. To meet these challenges, a widely used best practice by top performing companies is to utilise online access to balance reporting, forecasting, and account reconciliation, along with setting-up controlled disbursement accounts. Leading corporations are 42% more likely to have web access to bank balance reporting, forecasting and account reconciliation than their peers. Further, controlled disbursement accounts used by companies to forecast their daily cash positions, gain better control over cash flow and take advantage of investing or borrowing options are employed by 46% of organisations to maximise funds and manage daily cash requirements.