The Dynamics Behind AR Automation
An Overview of Order-to-Cash Software Solutions and Why They Work
My first exposure to the power of accounts receivable (AR) automation came in 1990 when I was credit manager at ERICO Fasteners, a mid-market, specialty metals manufacturer. The first month after we automated a few basic features to supplement our accounting package, we realized an increase in cash flow of 30 percent. During the 10 years I’d been in business credit, I had never seen anything like it. It turned out to be only the first illustration of the dynamic power of AR automation I would encounter.
In the Beginning . . .
A new accounting system designed for custom manufacturers, with very little collections functionality, even less than the previous system, had been implemented by ERICO before I was hired to fix the mess it had created for the credit function — a Days Sales Outstanding (DSO) in excess of 90 days. We initially threw bodies at the problem in the form of temporary employees to realize a modest improvement. Our problems, however, were systemic. Maintaining a large staff wasn’t in the cards, so we needed to find a better way to get the job done.
Because B2B collection software wasn’t yet commercially available, we were very fortunated to have a very capable and open minded IT manager, Working with him, we were able to consolidate most of the information my three permanent collectors needed onto three screens, as opposed to the eight that we were regularly using with the new system. One was an order release screen that included a summary of each customer’s AR. The next screen provided full customer details including open invoices and contact information and the last screen enabled us to enter customer notes, a feature that did not come with the accounting software. Because we were using PCs in terminal mode to access the AR functions of the IBM 360-based accounting software, navigation was simplified by simply scrolling forward or backward between the three screens.
At the same time, I used the IBM 360’s generic report generator to export a CSV file of customers that were 1-30 days past due. We merged that file with Word Perfect to create a dunning letter series run on or about the 10th and 20th of each month. We also found that adding short handwritten notes and highlighting balances improved response rates to these unsophisticated letters as well as the end of the month statements we mailed (we didn’t even have faxing capabilities back then).
Three things drove our 30 percent productivity gain:
Greater Visibility: we were now spending much less time gathering information prior to making collection calls or while reviewing credit holds in the order queue. Our reliance on paper records was greatly diminished, resulting in quicker, better informed decisions and more tasks completed.
Ease of Navigation: I’ve seen AR solutions that provided tremendous customer visibility, but accessing much of it required navigating to screen after screen, negating any benefits. Our system allowed us to see everything we needed on a customer with just one or two mouse clicks, saving an enormous amount of time.
Greater Coverage: The automated dunning allowed us to concentrate our collection calls on the customers that had gone over 30 days past due and those who owed large amounts.
Very simply, overnight we began reaching more past due customers more often than we had before. With a staff of eight, it took us a year to get the DSO under 70 days, roughly a 25 percent reduction. With the software improvements and only three collectors, we were able to reduce the DSO to 43 days over the next nine months, an additional 37 percent drop.
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