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Receivables automation: The key to unlocking trapped liquidity

Financial Institution: Optimize Payments

business man presenting

COVID-19 has laid bare much of our nation’s unpreparedness for a global pandemic. On a corporate level, the hit to balance sheets, coupled with outdated, manual receivables processes has meant many corporations are waging a battle of decreased earnings and lack of visibility into trapped liquidity. While many would claim the role of Accounts Receivable has long been overlooked and underfunded, the pandemic is bringing a new sense of urgency to this largely manual function.

Banks, often looked to as a trusted source of information and technology for their corporate clients, have the opportunity to help corporate clients regain control and visibility into receivables, allowing companies to unlock the trapped liquidity they need, especially now.

In February, amidst a very different world economy, industry experts Dave Robertson and Beth Bourgoin, Deluxe, spoke on the challenges and misconceptions of the integrated receivables process at Deluxe Exchange 2020. They said that Accounts Receivable might just be the quiet superstar within a company; not only does AR touch the customer, but also the balance sheet and the liquidity of the organization. Get AR wrong and not only are customers upset but revenue can go unrecognized. Their thoughts, important then, have gained a new significance in our COVID-19 world.

Becoming undisruptable

Becoming undisruptable – averting the disruption between customers and vendors was the topic. So, what are some of the factors that can throw AR processing into chaos? And what are some of the automation tools available to enable fast, streamlined and accurate AR transactions? Read on to learn:

  • How AR is being disrupted
  • The true costs of manual processing
  • How banks can deliver the automation advantage
  • The four key points of AR processing
  • The role of Artificial Intelligence in automation

Although paper checks are still the largest percentage of business-to-business (B2B) payments today, the shift toward other payment vehicles, especially Automated Clearing House (ACH) payments, is rapidly accelerating due to COVID-10 disruption. This trend is forcing businesses of all sizes, especially the largest ones with high receivables volume across multiple payment types, to look for more efficient ways to receive and consolidate payments, and re-associate payments received with the related remittance information.

How AR is being disrupted

The challenge of AR is twofold, says Robertson:

  • How does an AR team come to grips with all the inefficiencies that have been pushed onto them?
  • With new billing and payment methods emerging all the time, how do you structure your AR in a model that can be adaptable and dynamic, rather than having a closed system that chokes on any outside changes, or internal changes – like a merger?

Fragmented, inadequate data is at the root of the AR battle. Outside of cash flow, data has become the lifeblood of a business. Despite its critical importance, receivables management is often a fragmented and decentralized operational activity. A large property management company may collect payments at their properties, resulting in a fragmented Accounts Receivable environment, divided by product, market or segment.  Receivables data is particularly critical to understanding customer behavior, risk and opportunities. Here are other issues with AR:

  • Upset customers: The quality of the billing and paying experience has a major impact on customer relationships. When data isn’t centralized, errors like double-billing or false collections can occur. Phone calls asking customers when and how they paid can make for a frustrating experience. How long are customers holding on the phone while resources are hunting through multiple portals or bank sites for payment data? Is the payment data accurate? Repeated, negative experiences can diminish brand value and lead to customer attrition.
  • Low Straight Through Processing (STP) rates: Manual receivables processing activities result in (STP) rates for ingesting, processing and posting collections and associated remittances. Low STP rates can be time-consuming and costly for corporations.
  • Increased risk. A lack of standardization and automation makes it difficult to validate, log and audit activities. Receivables at risk of credit loss and fraud risk can take longer to identify and be more challenging to resolve due to the inability to quickly obtain and use relevant information. Furthermore, when staff time is consumed with manual operations, little time can be deployed toward oversight and control.
  • Revenue leakage: Decentralized AR functions are often characterized by significant revenue leakage, due to incorrect deductions and sub-optimal follow-up on and resolution of outstanding receivables. Rigorous management of the revenue cycle is only possible with data, analytics and strong governance. It is difficult to manage the complex revenue cycle across fragmented, understaffed teams and functions.
  • Liquidity disruption: But most importantly, ineffective receivables processes also have downstream implications for liquidity management. Understanding the cash flow of receivables collections is critical to planning and forecasting cash. In the case of a multinational firm, it can also be a critical component to foreign exchange exposure estimation and risk management. Lack of central oversight of collection and lack of good data on collection patterns segmented by product, customer, market and other parameters impedes the creation of a dynamic, accurate forecast. This, in turn, makes it difficult for treasurers to forecast and plan for working capital shortfalls and surpluses, increasing borrowing costs and reducing investment yield.
bank employees meeting

The true costs of manual receivables processing

Businesses are spending extraordinary amounts on managing receivables today, with a lot of the cost going toward labor-intensive manual processes that could be automated and accelerated. Robertson cited an analysis of 30 million different companies and in just the receivables portion of their order-to-cash cycle alone, they’re spending $115 billion. And this number was before the stay-at-home mandates of COVID-19 and the business interruptions resulting from it. The true cost of manual processing with the challenges of a remote workforce are only beginning to be calculated.

The irony in these numbers, says Bourgoin is that of the $115 billion being on receivables, a full 77% (or $88 billion) is going to full-time employee pay. The need to automate goes beyond simple dollars and cents saved in payroll, however.

Human-centric AR processes can result in a variety of difficulties, both in optimizing efficiencies and accuracy today and in the lack of process continuity over time. “We're seeing a range of different scenarios,” said Bourgoin. “One is that an employee who has been doing this function forever, day in and day out, but is retiring or going on vacation. So, how are corporates handling situations with employees who have all this AR data and knowledge – how do you replace that? How long is it going to take to do that training?” Again, these are the issues pre-COVID-19. There can only be speculation at this point as to how disruptive furloughed and remote workers are to this manual process.

Also, says Bourgoin, "when we look at where the errors are, and what's happening, we need to fix it up front during this part of the manual cash application and receivables portion. This can eliminate some of these downstream effects such as incorrect customer billing, or a buildup of unapplied cash that can lead to poor cash forecasting and hurt a company’s ability to grow.”

How banks can deliver the automation advantage

Robertson and Bourgoin believe banks, which have trusted partnerships with businesses and look out for their clients in unique ways, have a big opportunity in offering Accounts Receivable automation services, and capturing more of that AR spending.

“If you look at the Accounts Payable spend,” said Robertson, “the banks didn't capture all the automation opportunity that fintechs and others grabbed. But while banks capture 15% of the spend on Accounts Payable, they only capture 8% on Accounts Receivable.” Over time, banks introducing AR services that corporations pay for can actually help the company’s full-time employee costs go down. And a lot of those FTEs can move from being operational workers, to becoming more knowledge workers.

In terms of modernizing, added Bourgoin, one of the easiest pieces to talk about is electronic payments – especially in lockbox. “Everyone has been doing it forever, they know what to do, how to make it more effective, what they can manually manipulate and call ‘automation.’ But we’ve done some time and motion studies on electronic payments, where they don't have all the data in a nice neat package. Corporates have looked at how long it's taking their employees to apply an electronic payment, and it's taking three times longer.”

Companies get intrigued by the possibilities of faster payments, but Robertson and Bourgoin caution that payments still need to be brought into the accounting system accurately, so customers continue to get billed correctly. It’s not always as simple as it sounds. Corporations need to think through the entire process and find where and how automation might help most.

The four key points of automation processing

According to Robertson, based on Deluxe studies using bank data, there are up to 25 opportunities that many corporations have to create value in AR. And these opportunities are typically bucketed around four key pain points:

  • Paper: if you're not digitizing or eliminating paper as early as possible, you're usually experiencing more delays, inefficiencies and potential errors.
  • Fragmented data: Often, data is organized by payment type, which can create confusion and delays when customers call to ask about transactions; but it's also about normalizing the data and using a common taxonomy that lends itself to both automation and analysis.
  • Manual processes: using and managing the data manually versus using automation to do things like automating cash application.
  • Ad hoc management: labor-intensive tasks performed a certain way by certain employees “because this is how we’ve always done it.” Many people think automation solutions are just a way to eliminate FTEs, but really, the goal could be to reorient some FTEs into higher order activities, and get more value, like:
    • Managing DSO
    • Eliminating unauthorized deductions
    • Coming up with better collections strategies
    • Analyzing trade-offs between finding the right credit terms that incur risk versus generating revenue

The goal in helping corporations to become undisruptable, according to Robertson, is to “get all the data together in its richest form as quickly as possible; it’s really about getting things into a comprehensive digital environment, and leveraging that digital information for automation strategies and intelligence to help drive optimization across different areas of the company and improve decision making.”

bank employees talking

The role of Artificial Intelligence in receivables automation

Like every business, the companies that bankers serve want to be able to sell, grow and win in their market. But if there are problems in the cash application process, it doesn’t allow for the excess cash that can help fund growth. “That’s why automation is so exciting,” said Bourgoin. “And when we talk about automation, we focus on Artificial Intelligence.”

Machine learning is a type of AI, says Bourgoin, because it takes a lot of the manual work and figures out how to take the manual processes out of the equation. Machine learning can look at all the data you already have – payment data, open receivables data and remittance data that gets forwarded to you, and scan it for you.

One Deluxe customer had roughly 3,000 items on one of its ACH payments. It took a full-time employee 12 hours to process it. And the associated payments came in two to three times per week, so it was, essentially, his full-time job, says Bourgoin. “And that's just one payment from one of its customers!

So we came in and asked, ‘What if you could automate that, so you just click two buttons?’” said Bourgoin. “That's what we focus on – defining the automation, using the right technology and understanding how simple you can make the process.”

And, by using an Integrated Receivables solution, banks can help their customers not only easily combine and organize payment data from all sources, but also provide a holistic view of all the data in one place, right at their fingertips. “So, your accounting system is the real source of truth and accurate information,” says Bourgoin.

Getting started on your journey

To begin, AR teams need to develop a comprehensive receivables strategy. A comprehensive strategy is critical to maximizing your investment in the required technologies. Here are four essential points to include in your planning efforts:

  • Determine what the word ‘automation’ means at your enterprise. AR groups must rethink their perceptions of automation and invest in solutions – not technology products - that impact their practices, processes and decision making. While change can be daunting, it can also be an opportunity for AR teams to revisit current and accepted receivables approaches to achieve improvements in operational efficiency and independence from physical processes.
  • Crunch the numbers. What is your cash application processing environment like today? Figure out how many staff are dedicated to this process. Also, project your headcount increases for the next three years. It’s important to determine how much effort is being put forward today to set a baseline for savings tomorrow. In addition, it allows you to plan how current staff can be re-deployed to other value-added projects within your organization.
  • Accommodate perpetual change – not new payment channels. Rather than having a closed system that chokes on any outside disruption, or even an internal change like a merger or a change in business mix, enterprises should restructure their AR using new models that allow teams to be adaptable and dynamic as things change.
  • Take a giant step back and get on the same page. Review your total operational flow. Where are the manual bottlenecks? Where are the kinks? Are all of the steps really necessary? What can be cut? What are the most common customer complaints? In addition, make sure everyone on the team is clear about goals and objectives.

Learn more in this on-demand webinar, Becoming Undisruptable: Innovative Technologies to Regain Control of AR Processing.

Or listen to this podcast for more examples of why today’s manual AR processes can be a problematic strategy for corporations. 

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