Many organizations gauge their overall business quality via cash conversion performance. Enterprises in the upper quartile of working capital performance metrics do a great job of improving their cash conversion rates, based on EY’s latest working capital management report. They are often flush with cash, but they continue to focus on improvements in areas such as quote-to-cash to reduce bottom-line costs and increase top-line growth. The hallmarks of such high quality companies are impactful and efficient cash conversion processes as part of a thoroughly integrated cash culture.
Benefits of Maximizing Cash Conversion
Having and building cash on the balance sheet provides a myriad of benefits:
Companies will have increased agility
Companies are more capable of consistently exploiting market changes
Organizations can pay down debt and better anticipate future challenges; a strong balance sheet is a huge advantage in this respect
However, in spite of the early lessons from the past two tumultuous years of COVID-19, many enterprises have neglected to focus on cash conversion. Smart organizations continue to focus on cash issues, starting with trouble collecting from customers, which is typically an issue of self-sabotage that is sucking up resources and needs to be resolved as quickly as possible.
Hidden Costs in Cash Conversion
Consider the quote-to-cash process. Most enterprises don’t understand that the vast majority of the costs incurred to collect on invoices are hidden. This occurs due to all the people touching steps in the process, which expands the opportunity for human error. Billers, sales support, collectors, and cash applicators are the tip of the iceberg. Well-paid sales reps may need to resolve inaccurate orders or hunt down missing purchase order information instead of just selling; which is what they’re supposed to be doing.
Cash can also get mixed up in legal and tax support, bank fees, software license fees, third-party collection fees, and management support. All are critical examples of hidden costs tied up in the quote-to-cash process. Furthermore, errors significantly increase costs and perpetuate a poor customer experience, resulting in a drain on resources, people, and revenue.
Leveraging Digital Transformation to Improve Cash Conversion
Automation is a crucial component of improving cash, including opportunities to introduce predictive analytics, robotic process automation (RPA), and software applications that reduce errors, increase productivity, and help humans and processes become more efficient. Improved processes and use of labor-saving digital advantages not only improve cash flow and mitigate the expense associated with the quote-to-cash cycle, but can also have a significant positive influence on sales productivity.
However, while new technologies can eliminate human interaction, they never wholly replace people from tasks such as contracting and developing sales orders. Automation tools alone will not be the saving grace in regards to cash improvement when processes are broken. Many finance leaders are trying to instill a cash culture in their organizations. This starts with cultivating an understanding of the drivers that affect the balance sheet positively or negatively. Then, as organizations grow and develop, they will be increasingly capable of concentrating not only on their results, but on how they attained those results. They’ll be competent in answering crucial considerations such as:
How much does it cost to convert a dollar of cash?
Who had to be involved in our improved cash conversion process?
How could resources be used better moving forward?
Lost revenue often stems from a culture where salesmen are not spending enough time selling, and the poor customer experience turns revenue away. It is not uncommon to find that sales reps spend less than 50% of their time on actual sales or proposal development. Salespeople are too often requested to perform too many tasks completely unrelated to their job, and then exacerbate the problem by not providing them the support and resources to minimize their involvement and re-center their focus on their lane.
Beginning Steps
Among the best ways to improve cash conversion is to process-map an invoice from the initial sales quote, via billing and contracting, collections, and finally to applied cash. The high amount of manual steps involved is surprising, and high error proneness is an inevitable result of this. At each point, manual steps can become a potential source of setbacks resulting in slower revenue building and increased rework. On top of this, the actual cost to invoice, including all labor and third-party fees, is often twice as high than most assume.
Even with low interest rates or a healthy balance sheet, smart CFOs are well aware that needlessly tying up cash due to highly manual and poorly developed processes isn’t the answer. Such finance leaders also thoroughly understand that ineffective cash conversion is a symptom of bigger issues that may be preventing sales reps from being able to stay in their lane and doing their job, which is likely running up administrative costs. Finance leaders who are paving the way for a cash culture concentrate on continuous improvement and seek effective generation of cash and efficient generation. They also appreciate that efficient cash conversion results in topline revenue growth and bottom-line cost savings.
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