Where are Consumer Goods A/R Departments Losing Money Today?
What you’ll learn
The decline in demand in 2021 might lead to blocked cash flow due to overstocked inventory from last year
Reasons why A/R executives at consumer goods companies must think about optimizing costs of operations
Factors resulting in high operating costs for consumer goods companies
For Consumer Goods companies, especially those dealing in essential goods, 2020 was not the worst year. The panic buying nature of the consumers, coupled with the uncertainty of when things would go back to normal, led to a massive spike in demand for consumer packaged goods. But 2021 will be different. As more and more consumers have become used to the new way of life, and with the slowdown of the economy, consumer goods companies will witness a decline in demand. To make up for this decline and the higher time it is taking for customers to convert inventory to cash and make payments, finance leaders will push their departments to reduce operating costs and drive efficiency at a bigger scale.
Cost Consideration is Important in the New Economy
In addition to the fact that CFOs would expect the A/R leaders to bring down the costs and maximize collections to make up for any loss in business, below are other reasons why A/R executives at consumer goods companies must think about optimizing costs of operations:
The Continuously Fluctuating Economy: Given its global nature, COVID impacted supply chains and consumer behavior all over the world in varying degrees. The pace at which most countries are reeling with the impact of the pandemic is quite different too. These factors make it difficult to predict when the global economy would go back to normal. By lowering costs, A/R departments can prepare themselves for a situation where things do not get back to normal as soon as they would have hoped.
Global Competitive Advancement: The Consumer Goods Industry is highly competitive, and enterprise CPG organizations worldwide are continuously trying to attract and retain more customers. Providing the best services often means higher costs for suppliers. But industry leaders who want to achieve best-in-class don’t just compare their services/products against the competition. The next decade’s best CPG company won’t be the one to provide just the best customer experience; it would provide desired consumer experience at a relatively lower cost and at a global scale.
The Finance Department’s Position within the Organization: In the past few months, the finance department has emerged as a true game-changer for the CEOs and the board of directors. They have the most understanding of how a company is doing compared to the market and control the levers to make the organization perform better. By reducing their operating costs and delivering the same value to the business, A/R leaders can permanently change the business stakeholders’ perception regarding finance being a back-office function to being a direct driver of working capital and cash flow improvement.
Factors Resulting in High Operating Costs for Consumer Goods Companies
A/R leaders have to grow the team size to deal with the large volume of receivables: Consumer goods A/R departments generate a high volume of invoices and receive deductions in almost the same proportion. To minimize lag, A/R executives rely on employing too many people to look after receivables management, resulting in many FTEs spending unproductive hours on a task as repetitive as cash application and backup document aggregation. This way, most CPG A/R departments are not utilizing their resources judiciously, causing an increase in their operational expenditure. One of our largest CPG customers in Canada was able to reallocate almost 75% of their resources to more strategic tasks by leveraging automation for just their cash application processes.
Despite electronic alternatives, most CPG processes are paper-based: Consumer goods companies with paper-based processes spend a ton of money on printing, packing, and mailing invoices. While these costs look trivial on the surface, HighRadius had received confirmation from one of our leading CPG customers, an apparel and footwear brand, that they spent $250,000 a year on paper before they started leveraging our cloud solutions.
Top-notch customer experience brings additional costs: While traditionally, the A/R departments have not always been customer-centric, there has been a shift in recent years. A/R executives have accepted spending more time on training their customer-facing analysts to enable a better experience. From enabling 24/7 support for the customers to employing more people on the team to resolve customer issues faster, the receivables department has been incurring additional costs to prioritize customer satisfaction.
Integration with external groups such as banks and credit agencies has its costs: The A/R department seldom operates independently. In addition to many internal stakeholders, they work with outside groups to access data and perform an action. The most common external stakeholders are banks that charge a lockbox fee and a keying-in fee to capture and process remittances on behalf of the CPG company. Additionally, credit agencies charge a significant amount to provide access to data required for making credit decisions. These two sums amount to a considerable percentage of the A/R department’s operational costs, which they can eliminate with ease. HighRadius has worked with multiple suppliers to eliminate their integration costs by 100%.
HighRadius works with 9 out of 10 of the World’s largest CPG companies. Our customers have reported significant improvement in their A/R efficiency and process effectiveness with cloud solutions deployment. Danone (a leading global food & beverage company) achieved a 75% reduction in operating costs with our cash application solution. If you are looking to make a similar impact within your organization, adopt an A/R automation solution. To know more, get on a call with our expert today.