Receivables & Collections Management: Adoption is Past Due

Several years of economic uncertainty and the passage of the Sarbanes-Oxley Act of 2002 (SOX) have done wonders to raise the profile of accounts receivable (A/R).  As businesses have shifted their emphasis from growth to cost containment, productivity enhancement, and risk management, credit and collections departments have come under renewed scrutiny for their reliance on costly and inefficient paper-based processes.  At the same time, SOX has increased senior managers’ focus on accounts receivable by drawing their attention to the compliance risks inherent to manual, paper-based processes and their inability to adequately evaluate and report on the credit risks embedded in their A/R portfolio.

Our research indicates that these forces have sharply increased credit professionals’ interest in a rapidly maturing set of technologies that we call Receivables and Collections Management automation (RCM).  According to our 2004 Financial Automation Survey of finance, treasury and accounting professionals, 29 percent of respondents planned on implementing collection software solutions in the coming year.  Furthermore, 38 percent said that SOX has increased their interest in new financial automation technologies.

The Case for Accounts Receivable Automation

The current economic climate has also raised the interest level in receivables performance.  During the boom times of the 1990’s, if you could make the sale, you could probably count on collecting on the deal as well.  With the recessionary climate that so far has been the hallmark of the new millennium, and the resulting return to reality, risk management in the form of credit and collections has regained some measure of its past importance.  Once again DSO is a top priority followed by the application of a number of technologies that benefit receivables management.

As a result, credit departments are being challenged as never before by upper management.  Most critically, a sizable majority is being asked to improve performance with smaller staffs.  In the best-case scenario, credit managers are being asked to do more without the hope of any additional staff resources even in the face of ongoing corporate growth.  On top of this, many organizations have implemented ERP solutions that are woefully inadequate in terms of RCM functionality, and which in many cases replaced legacy or home grown systems that were better suited to credit and collections management.  Keeping this scenario in mind, we see RCM solutions as meeting a critical need in the corporate financial supply chain.

Benefits of the New RCM Paradigm

Credit and collection departments that utilize a RCM solution experience a wide range of benefits, depending on the type of solution they deploy.  In general, however, they benefit in the following three areas:

Processing Efficiency.  On the front end, credit approval tools contribute by accelerating new account application processing as well as order approval cycle times.  Collection and dispute management solutions accelerate transaction and account review, discrepancy resolution, and contact activities by providing collectors with a consolidated database with integrated workflow and communication tools.  On the very back-end, auto-cash solutions speed up the cash application process.  Additionally, pre-billing applications that either provide automated identification of trade promotion-related payment deductions or audit outgoing orders for compliance with customer expectations, greatly reduce the number of discrepancies that the credit and collection departments must address.  Maximum efficiency is achieved when all facets of RCM are used together to automate the entire scope of the order-to-cash process, driving down past due balances, DSO and bad debt losses.

Lower Costs. RCM solutions drive down transaction costs by accelerating front-end credit approval processes using lower cost data and by reducing the root causes of disputes and automating manual tasks on the back-end.  Credit scoring technologies eliminate the need for highly manual credit approval processes that rely on expensive credit reports.  Internal receivables data, coupled with key data elements supplied by the credit bureaus can significantly increase decision quality and throughput at substantially lower costs per account.  Once you move beyond credit in the order-to-cash process, highlighting issues that require rework, using the information to drive process improvement or better yet correcting order discrepancies before generating an invoice, you can greatly reduce the incidence of disputes and their related costs.  The automation of manual tasks very simply enables organizations do more work with smaller staffs.  The combined effect is a substantial reduction in transactional friction.  Reducing transactional friction can be directly correlated to reductions in the overhead required to support your A/R processes.

Enhanced Visibility and Control.  RCM solutions greatly increase your visibility of the order-to-cash process.  On demand, real-time access to complete accounts receivable details and supporting electronic documents facilitate workflow as well as reporting and analysis by eliminating the need for physical records. Increased visibility into the order-to-cash process enables the early remediation of problems and facilitates collaboration when issues need to be resolved.  In addition, RCM solutions allow collection supervisors to monitor collector activities and then be able to adjust workflow and account assignments to assure performance goals are met. And finally, greater visibility of the risks within a firm’s receivables portfolio allows management to make better decisions in order to optimize the risk/reward payoff.

Future of the RCM Market

We believe the RCM marketplace has finally attained critical mass.  It has clearly moved beyond the early adoption phase.  There are now a significant number of vendors in this market space with established track records and proven solutions.  But while the RCM market is maturing, it remains youthful.  New entrants are regularly popping up on our radar screen, introducing new RCM solutions and products.  We are also aware of several ventures that are working on RCM solutions, but who are still flying under the radar.  Our point is this: though much progress has been made, there remain amble opportunities in an expanding RCM arena.

PayStream Advisors’ latest Corporate Insights Report titled, “Receivables & Collections Management: A Buyer’s Guide to Collection Automation Solutions” is available for download from our online store.  This report, profiling leading receivables and collections management automation solution providers, offers valuable insights into RCM solutions and helps managers compare and contrast different solutions to identify the one that bests suits their organizations' requirements.  The report is available inside PayStream Advisors' Report Library.