Customer Profitability: 5 Hidden A/R Costs That Eat Away Your Bottom-Line

Introduction

41% of finance programs are focused on improving margins (Source: CFOs Focus on Profitability and Growth in 2017)
A survey report by The Hackett Group mentioned that a seven-day reduction in cash conversion results in a 1.2% improvement in gross margin. For a company with a gross margin of 10%, a decrease in DSO by 7 days means a 12% growth in profit. (Source: 2017 US Working Capital Analysis, the Hackett Group)
But barring the impact that DSO has on lowering costs, there are 5 additional A/R costs that affect ‘Customer Profitability’. Customer profitability focuses on identifying and reducing the ‘cost to serve’ for each customer.
The costs to serve can be broadly classified as:

1. Payment Processing and Payment Acceptance Costs
2. Cost of Collecting Receivables
3. Deduction Recovery and Write-Offs
4. Invoicing Costs

This blog will entail how optimizing the above cost centers with automation would add $1 Million+ to your net profit margin. Let’s see how.

Profit Impact from Payments Automation

Payments automation uses technology to aggregate remittances from multiple sources such as emails, portals, and EDI, irrespective of format (CSV, pdf, txt, EDI 820, paper, etc.) and link them with the payments received (ACH, Wire, Credit Cards, checks, Real-Time Payments, Virtual Cards) from the banks. Once the payments and remittances are linked, it gets auto-posted to the ERP. The system is ERP agnostic, meaning it is compatible with all ERP systems such as SAP, Oracle, Microsoft Dynamics, Sage and legacy systems.

Potential savings achieved by automating payments are:
FTE Savings: Automation for capturing remittances from email, websites, and EDI saves 50% of your analysts’ time
Lockbox Savings: Automation for check remittance processing eliminates key-in costs
ACH Adoption: The cost of receiving ACH payments is five times less than checks. Automation paves way for E-adoption and addresses the growth in E-payments. ACH is expected to surpass checks as the most popular payment method by 2020.
Credit Card Savings: Optimizing credit card compliance incurs significant cost savings by implementing a system that supports Level-III data

Profit Impact from Collections

The capabilities of automated collections management are:

• Creation of prioritized worklists based on aging details and risk categories of customers
• Automated mass correspondence with in-built templates
• Proactive reminders before payment due date
• Keeping notes and tracking payment commitments

Potential savings achieving by automating collections are:
Borrowing Costs: Borrowing costs due to WACC is reduced by collecting faster, using strategies such as proactive reminders, strategic dunning, mass correspondence.
FTE Savings: Automated worklist preparation and mass correspondence saves 67% of analysts’ time. Analysts only focus on making critical calls.

Profit Impact from Deductions

Automating deductions management is capable of:

• aggregating customer backup documents (claims, deal sheets) and vendor details (Proof of delivery, bill of lading)
• auto-resolving trade disputes
• disputing in customer portals
• predicting valid deductions

Potential savings achieving by automating deductions management are:
Additional Recovery: Automation frees up analyst bandwidth by 20%, allowing them to work on additional deductions
Write-off Savings: Keeping the auto-write off level at $0 decreases invalid write-offs and generates hard dollar savings
FTE Savings: 50% of analyst productivity saved in downloading backups or pushing disputes to websites

Profit Impact from Invoicing

Automated invoicing prepares electronic invoices at a line-item level and sends them to customers periodically via emails/fax along with payment portal link.  
Print and Mail Savings: Self-service customer portal cuts down on print and mail costs.
FTE Savings: With automated invoice preparation and delivery, analysts do not need to manually create invoices and deliver them.