MANAGING THE AR PROCESS

The accounts receivable business process is driven by the revenue process and includes the subcycles of acquiring and accepting customer orders; writing sales contracts; granting customer credit; shipping or otherwise delivering products or services; billing and recording sales and lease transactions; maintaining and monitoring accounts receivable; instituting effective collection procedures; recording and controlling cash receipts; establishing pricing and promotional activities; and properly valuing receivable balances.

Traditionally, the accounts receivable cycle was defined as beginning with an invoice and ending with a payment from the customer. Today, AR is being viewed in a broader way—beginning at the moment a company receives a purchase order from a customer (or actually, at the moment AR accepts a new customer), and ending when the company receives payment.

Accounts receivable is also being analyzed for its potential to become an “end-to-end,” or “touchless,” operation, requiring minimal human intervention. Interestingly, as technology becomes more sophisticated, the AR process does not actually end at the payment stage. If a document management system is in place, for example, the valuable information gleaned from the AR process can be mined, stored, analyzed, and reported on at a later date to help improve AR processes and procedures.

While accounts payable (AP) has been the more prominent recipient of funding for automation and process improvement, companies are becoming increasingly open to finding ways to achieve visibility and cost savings. That is why eyes are now turning to AR as an AP counterpart for establishing state of the art practices.

Pressure on AR to speed up and enhance the order-to-cash (O2C) cycle remains relentless. Drivers include the need to: reduce costs, gain continuous visibility into customer financial health, improve cash flow forecasting, and respond to ongoing customer requests for longer payment terms.

By starting small and demonstrating the return on investment that even a low-cost automated innovation can achieve, AR, with the controller’s help, can build a case for projects that will promote cost control and efficiency as well as increase profitability for the organization.

To be truly effective, process streamlining and enhancement must precede automation. Otherwise, your company will automate flawed processes. In other words, it will continue to perform a process poorly, only faster.

HOW TO SPEED UP THE AR PROCESS

The following steps can be implemented to achieve greater speed and transparency in the O2C cycle, according to recent research by the Aberdeen Group:¹

• Standardize quotation and order management. Getting the information correct at this stage is critical. Companies that have standardized these processes have 30 percent lower invoice volumes requiring manual intervention later in the cycle.
• Integrate order entry, credit, billing, and collections. Rekeying the same data at each stage not only duplicates labor but also introduces error. Integrating solutions results in 41 percent more invoices processed per FTE.
• Create a single customer risk information repository. Companies that have created such repositories report 10 percent lower past due AR and are 31 percent less likely to cite customer default or nonpayment as a major problem affecting their business.
• Automate the O2C cycle. Survey respondents who automated key steps in the O2C cycle experienced volumes of disputed invoices 27 percent lower than those that had not. They also processed 14 percent more invoices per month with 9 percent less staff than peers that had not automated.
• Implement event management and automated alerts. Such solutions trigger a warning when a predetermined threshold is reached (e.g., AR over 90 days past due hits a certain percentage of overall AR), rather than waiting to find out until an end-of-period report. Companies using this technology are able to process 68 percent more invoices per FTE and have 57 percent fewer invoices that require manual intervention.
• Score the AR portfolio on a continuous basis. Companies that carry out this best practice report 28 percent less in past due AR than those that don’t. They are also more satisfied with their ability to set credit limits that accurately match customer risk profiles.
• Send invoices and receive POs and payments electronically. Companies that automate invoicing and payments receipt experience 37 percent lower AR past due levels than those that don’t.

DISADVANTAGES OF MANUAL AR PROCESSES

Manual processing stymies efforts to achieve visibility and, as a result, an organization cannot be as nimble as it needs to be in managing cash.

While small gains can be achieved by improving existing processes in a paper-based setting, more substantial gains in process improvement are achieved by moving entirely away from manual processes and working toward creating a fully automated—or “straight-through”—process that begins with an order and follows through to payment reconciliation.

In this type of end-to-end automated process there is little need for human intervention or rekeying from the PO stage to the payment process. In recent studies, AR managers and finance executives have reported that they are looking to:

• Streamline back office operations;
• Improve visibility and service levels;
• Reduce risk; and
• Optimize working capital.

Some organizations are implementing automation solutions in-house, in incremental steps. Others have combined in-house technology implementations with software as a service (SaaS) options and outsourcing of particular discrete functions. Still others have elected to outsource most or all functions of their AR operation with “transformational” outsourcing, a new brand of outsourcing in which the outsource provider becomes a strategic partner in helping the company transform a process from an inefficient and costly manual operation to one that utilizes process improvements and technology to develop a low-cost, highly efficient system.

ORDER PROCESSING

Order processing is different for every company, and best practices are dependent on the size, quantity, and price of the product or service. For a company that sells a large volume of low-priced products, that order may take place over the Internet or through inbound customer service calls via a credit-card transaction.

High-priced items are usually sold through a sales force and entail a formal quotation or proposal, and often a signed contract. They also typically involve extension of credit, and require invoicing and possibly collection follow up. Furthermore, some companies sell internationally, which means dealing with different cultures, tax issues, and customs to bring merchandise in and out of the U.S.

Some companies process all of their AR functions manually, while others are fully automated. Each company needs to analyze its specific needs in establishing policies and procedures for order processing, as well as other accounts receivable processes.

Order processing begins upon receipt of a customer’s order. Orders can be received through any of the following channels:

• Telephone;
• Fax;
• Postal mail;
• E-mail;
• Electronic order/purchase order;
• Internet;
• Salesperson; and/or
• Walk-ins.

Once a customer makes a purchase, it becomes the order-processing department’s responsibility to: Verify it meets the requirements of a valid order. These requirements are as follows:

• Check the customer’s credit;
• Accurately enter the order into an order-processing system;
• Verify inventory or service availability;
• Acknowledge the order with the customer; and
• Route the order within the company to be fulfilled.

Order processing impacts many departments, including billing, inventory, purchasing, operations, and production—all of which must work closely together to ensure timely fulfillment, customer satisfaction, and payment.

For an invoice to be accurate, an order has to be entered into the system correctly. One of the largest causes of late, disputed, or unpaid invoices is real or perceived errors on an invoice. It is critical to have the order placer’s, payment approver’s, and payment maker’s contact information.

ORDER VERIFICATION

Before an order can be entered into a system, it must be reviewed to ensure it is an acceptable order that can be fulfilled as ordered. The following elements need to be verified:

• Price;
• Freight or delivery terms;
• Payment terms;
• Delivery or completion date; and
• Quantity of the service or item ordered.

The process of an order’s verification depends on such factors as the product, quantity, and sales dollar volume. For a low-priced product sold over the Internet, verification could be as simple as credit card approval. But for business-to-business and professional purchasing, where a sale results from credit extension that requires invoicing a customer, it is very important to verify that an order is legitimate and the person ordering the product is authorized to do so.

In addition to verifying the above information, the order’s validity must be confirmed. The order must be a legitimate order from an individual who has the authority to place orders. The best way to ensure an order is valid and legal is for the customer to issue a purchase order.

ORDER BACKLOG AGING AND EXCEPTION REPORTING

Order processing maintains order files for each customer account. An order file contains soft and/ or hard copies of documents that support the transaction (such as sales orders, change orders, and purchase orders).

At specified intervals, order exception and backlog aging reports should be generated and reviewed for details on the following:

• Inventory shortages;
• Special orders;
• Special handling;
• Missed delivery dates;
• Re-scheduled orders in production;
• Special pricing; and
• Aged orders not yet fulfilled.

ORDER PROCESS METRICS

Are you capturing order information correctly the first time? And are you using metrics such as the first-pass yield test or perfect order index to gauge how well your order entry systems function and how you stack up against other companies?

The order-to-cash processes are inextricably linked, and a misstep in any process—order entry, credit, invoicing, cash application, collections, or deduction management—can have a domino effect that ultimately impacts a company’s bottom line, customer relationships, and inter-department cooperation.²

Here are two metrics to gauge your performance:

1. The First-Pass Yield Test. The first-pass yield test is a quality measurement that can be used to gauge how an order entry system is performing.

   To use the first pass yield metric, ask: What are the key things that constitute a complete order? In other words, when an order department receives an order, consider what attributes are needed to release it to manufacturing with a high certainty that the order is not going to change.

   Attributes to consider might include pricing, delivery date, and correct approvals. The number of attributes isn’t as important as selecting criteria that are relevant to your company.

2. The Perfect Order Index. The Perfect Order Index (POI) takes a holistic approach. A “perfect” order is an order that is on time, complete, damage-free, and contains the correct documentation. To compile the POI, calculate the percentages of how often an order was on time, complete, damagefree, and had correct documentation. Then multiply the results.

   For example, a company that achieved 95 percent for each metric would have a POI equal to 81.4 percent (.95 X .95 X .95 X .95 = 81.4).

   Using metrics like the first-pass yield test and perfect order index can provide useful information about the order entry process and enable controllers to benchmark their company against other organizations in order to learn more about customers, market segments, and workflow.

ORDER PROCESSING STANDARDS

The following standards represent the minimum controls to be implemented for the revenue process.³ They are more applicable to large public companies, but can be modified for use at smaller companies.

CREDIT MANAGEMENT

Credit management is the first line of defense in protecting the company’s most valuable asset: cash. But credit management is also involved in the effort to obtain cash by enabling sales of the company’s goods or services to customers. The challenge lies in balancing protection with the company’s sales objectives.

Denying credit terms to a customer could prevent the sale of products or services. Protecting the cash too carefully could result in fewer sales and less cash. The credit department must find the balance between protecting the cash and increasing sales.

Each company must determine a risk factor that will allow it to gain adequate market share without having an uncollectible receivable amount that becomes unmanageable and jeopardizes the company’s financial health.

This risk factor can be built into the price of the product as a cost of doing business. The first major assignment of the credit manager is to understand the complete profile of the potential customer. In order to determine the creditworthiness and apply risk factors, credit management should:

1. Know with whom you are dealing, both the company and principals involved.
2. Understand and identify the correct the legal entity with which you are dealing (example: Is this a sole proprietorship, an LLC, or a large commercial client—and is this a subsidiary?).
3. Understand the business the client is in—this is important for both operational, credit, and reputation risk assessments.
4. Understand the credit profile of the legal entity.

Companies often focus on the creditworthiness of a business based on simple facts provided by the customer. However, to get a complete view of the business, fact-based information, validated by third parties, must be obtained.

Of course, the AR manager must balance the degree of effort in each step against the risk factors and the type of credit or business arrangement being entered into. Doing so is not a one-time effort, but rather an ongoing part of due diligence to maintain an effective and profitable relationship with clients.

With regard to risk, the evaluation process is not over once an account has been opened. Customer accounts must be monitored on a regular basis depending on how much cash could be at risk. This adds a critical task to credit management. Many companies do not perform this task of re-evaluating active customers. They leave it to be handled in the collections area. But the process in collections is reactive, and if customer reevaluation is moved forward to the credit management area instead, it could reduce the amount of cash lost by unpaid invoices.

When companies change this to a proactive process, credit management can re-evaluate active customers to determine if credit lines should be raised or lowered and assess pricing and other terms of the relationship.

The slow-pay accounts may need to have their credit line lowered or removed and changed to COD or credit card until payment trends improve, thereby eliminating the potential of an unmanageable receivables balance. Customers who are paying on time and have a strong history may need to have their credit lines raised to entice more sales. This requires new financial records, credit scores, and peer group payment history.

Companies also need to be careful of how they are measuring credit management. If all customers are paying on time, which is reflected in a perfect DSO, then the company may be missing sales. If all receivables are paid on time, it could be a signal that credit limits should be raised and that good potential customers are being turned away instead of being granted some line of credit.

Controllers may need to agree to accept a DSO that includes some late payments to ensure the company achieves its greatest sales potential.

DECIDING A LINE OF CREDIT

Some large companies negotiate payment terms that would be negative or derogatory for many industries. But accepting those terms might be worth it for a company’s business. The solution is to create a systematic plan and formula that all credit managers use to decide a new or existing customer’s line of credit.

This process should be standardized so application of the process is the same among all credit managers, and should reflect the company’s strategy. The process should also be efficient so that the application can be completed timely. The following factors should be considered:

1. The size of the credit or open account;
2. The nature of terms and payments;
3. The anticipated frequency of interaction with the client;
4. The availability and access to information;
5. Whether the process is centralized or decentralized (example: allow field sales some discretion to improve speed and reduce information handoffs and bureaucracy);
6. The amount of automation available for making decisions and monitoring the relationship; and
7. Company security, compliance, and audit requirements.

Is the financial condition of the company strong and is it trying to grow its market share? In this situation, the company can apply a bit more risk by either granting a larger credit line to a strong customer or applying a larger risk factor to a customer with less than desirable statistics and granting them a credit line. If the company needs to play it safe, because it needs the cash now, it can look to best practices such as taking credit-card payments to support sales while setting up a customer’s line of credit with little risk.

This systematic plan will include policies and procedures, pricing, third-party evaluations, risk ratings, and documentation.

CREDIT ASSESSMENT WITH A CREDIT SCORE

A credit score can be used standalone or in conjunction with other factors. A score can be a manual score of important factors, a credit bureau score for businesses, an internal score, or a combination score or matrix.

The credit score can be used to automate some processes and assign the terms and credit limit that can be offered to that customer. There is also the human factor. The credit manager has to weigh all the information to make the best decision that will get product and services delivered to as many creditworthy customers as possible, yet take some risk to make sure the company is not keeping products and services from customers that may not look good on paper, but who would pay their bills given the proper terms.

With today’s tools, it may be possible not to turn any new customer away. A customer with poor credit history could be given a zero line of credit with credit-card terms if the other aspects of risk are within company tolerance.

THE CRITICAL ROLE OF THE CREDIT MANAGER

The nature of the credit manager’s job is not merely credit. While due diligence is required to protect against fraud, it is just as important for the credit manager to be able to attract and retain profitable customers. When hiring for the position, look for an individual with high ethical standards and excellent communication and technical skills. The credit manager should be task and detail-oriented, a good negotiator, analytical, and professional. The position requires self-starters who are persistent and aggressive, yet professional.

CREDIT BEST PRACTICES

The following is a list of proven credit department best practices:

1. Develop a questionnaire for sales reps. Reps should fill out the questionnaire for a potential new customer to acquire credit information. This will reduce the research cycle time.
2. Work with accounts payable. This will help credit understand if there are any weaknesses in the invoicing process. It can also help tighten controls, build in defenses against potential fraud, and get invoices paid faster.
3. Visit customers with your sales reps. Conversely, have sales reps spend time in the credit department.
4. Familiarize yourself with the order-to-cash process. Understand the order processing, billing, cash application, deductions, and collections processes, and develop a complete end-to-end knowledge of the order-to-cash cycle.
5. Lead a phone campaign. Convert check payments to EFT.
6. Convert to credit card. Phase out cash in advance and COD.
7. Create a service level agreement (SLA) for customers. The SLA spells out how to do business with your company.
8. Create an SLA for sales reps. Sales commission should be paid only when the invoice is paid.
9. Involve sales reps in collection efforts. This will help eliminate bad orders taken to win a sales contest.
10. Implement imaging and workflow. Scan the sales order, the credit application, all financial statements, credit bureau reports, articles, tax forms, invoice/credit memos, debit memos, and checks for a complete audit trail of all documents. Grant authority to view based on need.
11. Consider a shared services structure. A shared service center can either be managed by the company or outsourced to a supplier of cash application, credit management, accounts receivable, and collections.
12. Centralize tasks duplicated across the organization. Also centralize billing, credit management, AR posting and deductions, and collections.
13. Look into outsourcers. Rather than spend a large budget on a new system and team to implement the system, review outsourcers first.
14. Go electronic. EFT lowers bank and internal processing cost. An EFT payment can range between eight to ten cents, whereas a paper check can cost between eight and twelve dollars. Plus, EFT equals money in the bank now, not days from now.
15. Negotiate terms that include electronic transfer. When opening a new customer account, arrange for payment terms with the payment method being electronic transfer.
16. Consider ACH. The Automated Clearing House Network delivers information in a secure system for the settlement of electronic credits and debits between financial institutions.
17. Sell ACH benefits to your customers. Offer attractive terms such as 2% 10 net 30 versus 2% 10 net 15 for a paper check. ACH eliminates the cost of controls related to: storing paper checks, prepping paper checks for mailing, postage, escheat, fraudulent cashing of paper checks, and float. If the customer argues that they don’t have the staff to link ACH to their system, mention the option of outsourcing payments to their bank or a provider.

CREDIT STANDARDS

The following chart provides a listing of suggested credit standards.

SALES CONTRACTS

The following chart offers an overview of sales contracts standards.

ORDER FULFILLMENT AND SHIPPING

For most businesses, the order-to-cash process can involve moving hundreds or thousands of pounds of materials and megabytes of data before the customer has the product and invoice in hand. The longer this process takes, the longer it will be before the business sees the bill paid.

Although the order-processing team might never venture onto the factory or warehouse floor that is fulfilling an order, it is imperative that order processing be tied into the entire process to help ensure clients are well served, and, therefore, have no reason not to pay their invoices quickly.

Order processing is part of the team that must meet clients’ expectations and help keep the promises made by the sales department, ensuring accuracy, thoroughness, and timeliness. Order-processing personnel can’t look into every box before it is taped shut and shipped off, but can help to create accurate invoices and positive relationships with customers or clients.

Fulfillment costs make up almost 10 percent of an average company’s cost of sales, so small improvements can make a big impact on the bottom line.⁴ Advances in ERP and order-processing applications have had a tremendous impact on order processing and fulfillment, resulting in lower manufacturing costs.

In addition, the Internet has played a critical technology role in supply-chain optimization and has been leveraged effectively by software solutions that drive these processes. Accounts receivable best practices reflect the new rules in order fulfillment strategies. With more manufacturing in far-away places and clients demanding individualized products, order fulfillment is moving away from holding finished products to on-demand order fulfillment.

Depending on the size of your business, drop shipping can save time and money. Drop shipping is when an organization makes a sale (and is in charge of the accounts receivable process), but a wholesaler or manufacturer actually fulfills the order and ships it to the customer.

Another fulfillment strategy is to employ integrated order fulfillment online, working with a thirdparty vendor. Fulfillment can be totally outsourced, although this does limit contact with customers.

A lot of work happens outside of the order-processing department between extending a client credit and sending out the client’s invoice for products or services rendered. However, order fulfillment is the foundation of customer service and continuing relationships. Following is a set of accounts receivable shipping standards.

BILLING

In most cases, vendors that supply products and services must generate an invoice in order to receive payment. The invoice should contain specific information on what the payment is for, when the payment is due, and other terms and conditions. Multiple items detailed on an invoice are commonly referred to as line items.

The invoice carries a vital mission: to ensure that the billing company receives payment for goods and/or services provided. Invoicing accuracy is the single most important determinant of effective and efficient receivables management. Accurate and timely invoicing helps reduce discrepancies and disputes, gets money in the bank faster, and ultimately improves cash flow. It also helps build good customer relations and future business.

Once relegated to the “back office,” billing is now moving front and center as a strategic functional area for finance. As new technologies like e-commerce apps and mobile wallets emerge, Implementing customer-centric billing and payment processes means getting paid timely, resolving disputes quickly, and complying with secure payment standards so customers have a high degree of security.

Customer-centric billing offers the following advantages:⁵

• Enhanced security and compliance. Organizations can assure a higher level of security when payment portals are set up according to strict standards such as PCI and SSAE 16. PCI, the Payment Card Industry Data Security Standard (PCI DSS), is a set of requirements designed to ensure that organizations (specifically businesses with a Merchant ID) that accept payments via credit cards have the capability to process, store, and transmit all credit-card information in a secure environment.

  SSAE 16 (Statement on Standards for Attestation Engagements No. 16) is a set of standards that all organizations should follow to offer a safe payments environment. It is an enhancement to the SAS70 (Statement on Auditing Standards No. 70), the widely recognized auditing standards for service organizations developed by the American Institute of Certified Public Accountants (AICPA).

  It is critical to include such features as data encryption and secure passwords to customers paying you through online and mobile applications.

• Lower costs and faster payments. New electronic billing and payment technologies keep costs down and ensure a smooth speedy cash flow. Every time you can send a bill electronically versus putting it in the mail, you save 50 or 60 cents per bill, because you are eliminating paper, stamps, and labor.

Implementing the following steps helps an organization become a more customer-centric biller:

1. Understand customer expectations. This involves segmenting the market and implementing those billing and payment channels that will best serve the majority of customers.
2. Educate existing and prospective customers. Organizations can use their new billing and payment services as a marketing tool. Some companies are even finding that prospective clients are looking for payment information in requests for proposals (RFPs).
3. Have an internal champion. Designate one person, or—better yet—a cross-functional team, to champion the process of the organization becoming a customer-centric biller. The team should include representatives from finance, IT, sales, marketing, and customer service.
4. Choose a vendor partner that can provide the right capabilities. Functionalities available include: paying through mobile phone, paying via QR code (Quick Response machine-readable code consisting of an array of black and white squares), accepting and tracking e-payments made through portals, tracking bill delivery, implementing dispute resolution, developing billing scorecards that track how your organization is doing with e-billing, and implementing finance reporting.

Customers have different needs than they had just a few years ago, and the billing process is playing a big role in winning business.

• Case in Point: Starbucks has a mobile app that makes it easy for customers to get on their smartphones, order their favorite drink, scan in their purchases, and pay their bills. So far, more than 7 million consumers have signed up for this app and Starbucks is getting more than 2 million mobile payments per month.⁶

Receiving payments by check can take days, as opposed to having that cash on hand. Customers are much more apt to pay quickly when you make it as easy as possible for them to do so.

BILLING STANDARDS

The following exhibit provides a list of billing standards.

THE CUSTOMER MASTER FILE

Customers are the single most necessary element to any business, so it is vital to maintain accurate, up-to-date information on every one of them. The most efficient tool for keeping track of customers is a customer master file—a central database that contains all pertinent information about each customer.

An effective customer master file can contribute to operational excellence by helping a company prevent inaccurate charges, reduce fraud, expand customer knowledge, ensure regulatory compliance, manage revenue sources, track payment histories, and save money.

While primarily a tool for the accounts receivable department, which should maintain it and control access to it, a top-notch customer master file is valuable to the whole company. It provides a portrait of the firm’s customer base, allowing staff members to identify customer patterns, analyze buying habits, and estimate likelihood to purchase new products—which can be used to enhance sales, marketing, customer service, and product-development efforts.

A reliable database of customer information can make your company easier to do business with, giving you an advantage in the ever more competitive marketplace.

SETTING UP A CUSTOMER FILE

A customer file would typically include the following basic information for each customer:

• Customer name—legal entity name and DBA name;
• Type of legal entity (corporation, LLC, etc.);
• Billing address;
• Delivery addresses (essential for calculating sales tax);
• Headquarters address;
• Customer number;
• Contract terms;
• Identification numbers of active contracts and purchase orders;
• Discounts;
• Credit limit;
• Contact name;
• Contact phone number and fax;
• Contact e-mail address;
• Order history;
• Payment record;
• Dun & Bradstreet rating;
• Tax ID;
• Sales tax exemption certificate;
• Date of last activity; and
• Contact names and contact information (requisition/purchasing, accounts payable, etc.).

Before setting up a customer master file, think through how it will be used, by whom, and for what. The answers to those questions will provide guidance for which information to include and which rules to create.

While anyone in the company who deals with customers may request that a new customer record be added to the master file, typically via a standard form, it is the accounts receivable department that should bear the responsibility for researching the customer’s information, verifying legitimacy, and entering the data.

Authorization and ability to enter new and modify existing customer records should be limited to an appropriately small number of AR staff, based on company size. Some companies have a separate Master Data Management (MDM) department to maintain strict control over access to and accuracy of the customer master (as well as the product master).

VERIFYING CUSTOMER DATA

Obtaining the correct customer data is one of the hardest aspects of establishing and maintaining the database. Confirming data validity is absolutely necessary, because minor errors can cause major problems, including: charging wrong amounts if discounts or other terms are incorrect; paying late or inaccurate commissions to sales staff; and angering good customers whose payments aren’t recorded.

Flawed or incomplete data can compromise customer analysis, leading to missed opportunities to anticipate wants and provide more highly valued goods or services. It is also critical to verify the legitimacy of the customer company, for example by checking Dun & Bradstreet or the Secretary of State’s office (in the customer’s state of incorporation), and to make sure that the company can legally be a customer by checking to see that it does not appear on the U.S. Department of the Treasury’s Office of Foreign Assets and Controls (OFAC) Specially Designated Nationals and Blocked Persons (SDN) list of individuals, businesses, and nations with whom U.S. persons may not conduct business.

In addition, financial institutions are required by the USA PATRIOT Act to document every new customer’s identity by obtaining, verifying, and maintaining records of the appropriate information—e.g., name, address, date of birth, and tax identification number.

When selling to consumers, only name and address are required, although a Social Security Number is required if credit is being extended. Most consumers pay with U.S.-issued credit cards and the banks will have handled the OFAC checks prior to issue. However, care must be taken with offshore transactions, as bank checks won’t necessarily apply.

A number of software packages are available to help departments that aren’t equipped to set up a customer master file. Companies can also contract out customer file setup and maintenance to a data management firm. Industry trade associations are good sources for recommendations. The U.S. government regularly updates and maintains a downloadable list of all persons and companies on the SDN List, which is available online at: http://www.ustreas.gov/offices/enforcement/ofac/sdn.

DUPLICATE FILES

Duplicates are one of the biggest problems in customer master files. Programming an automatic tax identification number look-up is one of the most reliable means of preventing duplicates, as long as they are consistently entered according to a standard format guideline (for example, consistently with or without dashes).

Other data points that can aid in preventing and eliminating duplicates are: customer name, address, zip code, and telephone number. While none of these is as reliable as uniformly entered tax identification numbers, a routine sort of the customer file by one or more of these fields can help reveal possible duplicates to be further investigated.

Updates should be entered as they become known, and a thorough quarterly cleanup can prevent problems in locating customers whose information changes. It can also provide a means to flag inactive customers, for example those who haven’t placed an order in 12 to 18 months, for approach by the sales team.

Records for customers who aren’t expected to return can be archived on electronic media, making certain that all legally required information is retained.

SECURITY OF CUSTOMER FILE DATA

Poor oversight of the customer file can allow myriad legal and practical problems to fester, such as:

• Identity theft;
• The sale of pricing data to competitors;
• Price altering;
• Unapproved discounts or other terms; and
• The entering of sales data that triggers fraudulent commissions.

Access to the database should be granted only to employees whose jobs require it, and those employees should be able to view only the information they need.

Ideally, the most secure passwords are alphanumeric, are at least 15 characters long, and are changed monthly. In the real world, employees can forget long, complicated, frequently changed passwords. This can lead to security breaches like writing them down and leaving them where they can easily be found.

Pre-hire and routine background checks can help ensure employee trustworthiness. Data encryption for sensitive information in transit, like credit card numbers, is absolutely necessary. Finally, both network and internal firewalls should be used. If an intruder breaks through the network firewall, the internal firewall protects each data module.

CASH RECEIPTS

Financial transaction processing in today’s environment is a critical operation for any enterprise. No matter the size of an entity or the nature of its business, there are logical, sensible, and proven practices for cash receipts.

Expediting receipts processing is a facet of reducing the cost of operations. Good AR practices also improve cash flow and cash management flexibility. While every organization must adapt best practices to its own circumstances, all can benefit from better cash receipt practices.

Following is an overview of proven practices:⁷

1. Monitor and improve your time-to-deposit. The time that payment sits idle is costly. While larger enterprises may use electronic payment processing, which shortens the time it takes to deposit funds, many businesses still have a time lag between remittance and crediting to an account.

   Once a check or cash is in your company’s possession, there is never a reason to hold up the deposit to the bank. Unfortunately, there are many instances when companies violate this golden rule. For example, the accounting department does not deposit checks because the staff is unsure to which account to apply the remittance or (worse yet) they know the account but don’t know which invoices or line items to offset.

2. Develop a process for handling, posting, and reconciling cash receipts. Handling of cash receipts, especially checks, is the beginning of creating a best practice around the whole area of cash receipts. When payments are received, especially checks, the check should be immediately captured digitally, endorsed, and posted to the relevant receivable.

   When a payment is received it should be posted as a journal entry to a cash receipts journal. That journal entry should also be posted to the relevant AR balance for that particular customer. The cash receipts journal should be reconciled against the bank deposit as well as the bank statement.

   When processing checks, it is especially important to verify and reconcile all checks against outstanding balances in the AR as well as to be reconciled against the relevant bank statement to ensure that deposits match amounts entered in the journal.

3. Enforce a strong segregation of duties. There must be a separation between those who handle cash and checks and those who handle the application to AR or the general ledger. The person with physical access to the asset (cash and or checks) should not be the same person charged with the responsibility for recording and accounting for the asset. From a fraud prevention standpoint you don’t want a single person or entity doing the entire process.
4. Establish a collections process and stick to it. The less your customers have to think, do, or work, the more likely it is that you’ll get paid. Automation improves collections. A pre-approved draft from your client via credit card or Automated Clearing House (ACH) payments should be on the top of your list.
5. When possible, centralize your receivables function. In structuring transaction processes within an organization, it is wise to adopt centralized processing for AR via the establishment of receivable finance centers or shared services centers. This allows for focused expertise to be utilized and standardized across multiple business lines. It also frees up staff for more value-added work.

   Another way to centralize is by outsourcing the entire receivables function to a third-party provider, domestically or globally. Outsourcing provides benefits of saving labor, facilities, and time that may outweigh the cost of operating such a function within an organization.

6. Embrace expedited check tools and mechanisms. The remotely-created check, which has some similarities to ACH, is gaining usage. It enables the creation of a virtual check using the Check 21 process.

   According to the Federal Reserve, “The Check 21 law facilitates check truncation by creating a negotiable instrument called a substitute check, which permits banks to truncate original checks, to process check information electronically, and to deliver substitute checks to banks that want to continue receiving paper checks.”

   A substitute check is the legal equivalent of the original check and includes all the information contained on the original check. Check 21 enables the electronic settlement of checks without the numerous rules associated with ACH and is much more business-friendly.

   Remotely-created checks can be useful payment devices. For example, a debtor can authorize a credit card company to create a remotely-created check by telephone. This may enable the debtor to pay the credit card bill in a timely manner and avoid late charges. However, remotely-created checks are vulnerable to fraud because they do not bear a signature or other readily verifiable indication that payment has been authorized.

7. Establish a policy regarding collections relative to the size of the transaction. For example, a $200 collection may cost $4.75 with a credit card, but only $0.15 with ACH. Credit cards may be a good ‘Plan B’ in terms of automated collection.
8. Be mindful of automated technology solutions for the AR function. Automation can achieve greater efficiencies in cash receipts processing, which ultimately contributes to an efficient AR operation and improves cash flow. There are numerous automated solutions—both stand-alone software solutions and enterprise-wide ERP solutions—that organizations may employ to automate and add efficiency to accounts receivable.
9. Consider commercial card payments. Card networks allow customers to pay invoices by creating payment instruction files generated by the customers and then sent out to customers’ and vendors’ banks. Although most businesses think of credit-card payments as being reserved for business-to-consumer (B2C) transactions, business-to-business (B2B) payments can also take place with credit cards, commonly called purchasing cards, procurement cards, or p-cards.

The ease for customers to pay with credit cards, and the ability for businesses to use credit cards like short-term loans, help make this option attractive for customers. Because the online networks for accepting cards are very well developed and have security in place, accepting cards online is not difficult or expensive to set up. From AR’s perspective, accepting credit cards is one way to guarantee that payment is made on an outstanding invoice.

Some companies have many rules about check-cutting, including that checks may only be paid on a certain day of the week or month. That means that days or a week (or more) could pass before AR can get payment. An alternative is to accept credit cards or p-cards. AR can often persuade the customer to pay for an outstanding invoice for smaller amounts on their corporate or personal credit card and have the money appear in the corporate account within a matter of one or two business days.

The obvious downside of accepting credit cards for payment is the bank service charges. However, many companies consider accepting credit cards worth it to get immediate payment, as in the case of early payment discount offers.

CASH APPLICATION

Cash application, or payment processing, is the process by which companies match customer payments with the amounts due from their customers—either manually or through an automated computer program.

This would seem to be pretty straightforward when a check comes in: look at outstanding invoices to determine what the check is for and apply the receipt to that particular invoice. However, it is rarely that simple.

All of the following can, and do, occur: payment amounts don’t match invoice amounts; the payment is often for multiple invoices but open invoices don’t add up to the check total; several payments are received from the same company at one time; there could be a credit memo; there could be a problem with the invoice and the customer paid the total less any discrepancies. All of these issues make it very difficult to correctly apply cash receipts.

Whether every check is manually reviewed and deposited, or an auto-cash function is used where cash application is automated based on specific algorithms that are provided, the process is very similar. Either way, it is important from an accounting and legal perspective to apply receipts on a timely basis. It is imperative to get all checks in the bank right away, even if you don’t know what they are for.

However, once a check is in the bank there is the temptation—if it is not obvious to which invoice or invoices the check should be applied—to move on to something else and plan to get back to the cash application later. But such a delay can lead to problems with customer relationships and financial reporting.

When a check comes in, the appropriate AR person needs to quickly and methodically review the customer’s outstanding invoices to figure out how to apply that amount to the customer’s account. Sometimes it is the only number that matches. Sometimes it is a logical match and a person or the AR software will easily apply it. Other times a match is not clear, and a person needs to sort out the problem. In any event, failing to deposit and apply a receipt is not acceptable practice.

Deposits should always be prompt, and whoever is responsible for cash applications must handle it right away. For those items that cannot be traced immediately to an open invoice or invoices, the payment amount can be applied to an unapplied cash account in the AR register. If a company employs an unapplied cash account, someone must have the responsibility of clearing that account daily so it doesn’t back up.

Internal controls should be established and implemented to ensure that cash is applied on a daily basis, and that the amount of cash received each day matches the amount applied. If cash is not applied against a receivable, a company often will send out more invoices or statements, and collections could call the customer regarding their “outstanding” balance, annoying the customer.

Accuracy in applying cash receipts is very important, and correcting a misapplied payment can take a lot of time. Someone will have to reverse the incorrect application and make the correct application. If the misapplication occurred in the past, it may require researching and correcting every payment since the error occurred to be able to reverse and reapply it.

In addition, if the customer is upset about the misapplications, it may decide to withhold further payments until the problems are cleared up. If this becomes a trend, it can be devastating to cash flow.

DEDUCTIONS

Some large companies are infamous for taking discounts on all invoices even if they don’t pay within the discount period offered. The company will write a check and list the invoices it is paying. The invoice will state, “paid in full” but, according to your company records, it’s short because the customer has taken a discount you weren’t expecting.

When this happens, AR should check with the sales manager before talking with the customer. Sometimes sales will strike deals to get the business but forgets to tell the AR staff. AR should ask for purchase orders and contracts, and explain that accounts receivable needs documentation to support approved discounts.

For example, did the sales manager offer a four percent discount? Instead of calling the customer, AR should document the rules, the correspondence, and the paper trails, and then see if the mistake was on the customer side or the sales side. If sales made an arrangement with the customer that it did not communicate to AR, AR has to apply the discount and write off the difference.

If the customer was wrong to take the discount, now AR has the documentation and can write a polite letter asking them to pay. Contacting customers about short payments is a balancing act in which finance has to weigh collecting the monies due while recognizing the importance of good customer relations.

GETTING UNAUTHORIZED DEDUCTIONS UNDER CONTROL

Here are some steps to get the costly taking of unauthorized deductions by customers under control:¹⁰

1. Quantify the opportunity: List all deductions taken over the past year by reason code ($ and #), locating all that are preventable and unauthorized. Now calculate your current cost to process deductions.
2. Set up a cross-functional team. Include a representative from each department involved, led by an individual who has management and cross-departmental support.
3. Prioritize and focus. Start with a single compliance issue or customer to understand the underlying issues causing the problem. Tackle that, then branch out from that foundation.
4. Examine the cash app process. Looking at your top 10 customers, analyze how many hours are spent manually preprocessing remittance information before deductions can be uploaded to your AR system. Set up a process so that your customers’ deduction reason codes are mapped to yours so that they are automatically assigned to deductions in your system.
5. Explore automation solutions. The greatest automation improvement opportunities come from: exceptions and returns management, including workflow; posting to companies’ internal AR, general ledger, credit management and treasury systems; and receivables reporting in a timely manner.
6. Institute trading partner sales agreements. To maximize trading partner relationships to help control deductions, institute trading partner sales agreements that include:
   • Returns policy (e.g., return authorization (RA) process, RA number indicated on return, shipping/handling charges, pricing, no deduction until credit issued, if allowance or destroy-in-field, right to inspect, periodic audit);
   • Intentional deductions process (e.g., authorization/approval process, number referenced on debit memo, proof-of-performance, new store discounts);
   • Terms (e.g., anticipation, aging based on date shipped versus date received);
   • Timing (e.g., PO changes, shortage claims and deductions must be received within X days of receipt of goods, provide for right-to-inspect); and
   • Required supporting documentation (e.g., authorization number, detailed debit memo with reason, invoice/PO/item/store/carton reference).

MANAGEMENT OF DISPUTED ITEMS

Although companies strive to deliver top-quality products along with accurate invoices, mistakes happen. For example, products can be damaged during shipment or clerical errors can show up on the accompanying paperwork.

The result is that finance ends up with a dispute that not only impedes the flow of incoming cash but also threatens future sales. Most finance departments have processes in place to manage disputed items and track them through the approval process. Disputes are generally relayed to credit and collections, because the customers will not pay until the disputed items are resolved and a credit memo is issued.

This is a poor way to manage customer relations. A much better way is to understand why problems are occurring and prevent disputes in the first place.

Disputes are caused by the following factors (listed in order of value):

• No invoice received;
• Wrong price and/or unit of measure on the invoice;
• No purchase order number on the invoice;
• No proof of delivery;
• Damaged goods;
• Short shipment; and/or
• Defective product.

Controllers can take the following steps to identify the errors that are causing the most trouble and establish programs to fix them:¹¹

Eliminate administrative errors. Most disputes are caused by administrative errors. Eliminate errors by improving administrative processes for sales and order entry and by providing training to sales and order-entry personnel. Training can eliminate most of the errors that lead to disputed items.

Perform a Pareto analysis. Analyze the disputed items by number of occurrences and value of each occurrence. This will help you determine which 20 percent of the disputed items are causing 80 percent of the problems. Then you can focus on the errors that are causing the most trouble and establish programs to fix them. In the analysis of disputed items, separate the disputes by type, with a value for each dispute.

Then determine totals in terms of number and value for each type of dispute. The disputed item analysis, along with the order-to-cash map, is the best starting point for establishing a working capital reduction program. It will tell a controller very quickly what issues are creating customer ill will and causing slow pay.

This analysis can also be used by manufacturing and logistics in designing inventory improvement programs. If you correct the errors, you will improve customer service and promote on-time payment.

Settle disputes promptly. When a dispute arises despite your prevention efforts, settle all customer complaints within five days of receipt. Settle all small claims immediately, and then focus on the large claims and on eliminating the root causes.

Simplify approval procedures. Many companies have large backlogs of unprocessed claims from customers because their approval procedures are so complex. They spend an inordinate amount of time tracking and processing claims. They require many people to approve claims and they fail to follow a clear and expedient timetable for dispute resolution.

Keep in mind that disputed items are booked as an expense the moment they are received by the company. That is correct accounting policy. Often people will put off approving claims because they don’t want their budget to be charged, but this only hurts customer relations and besides, the company already has recorded the expense.

Establish a threshold for automatic claims approval. Analyze recently settled customer claims to determine which ones were approved and which were not granted. Establish a policy to automatically approve all claims below a specified level.

Create a disputed-item approval policy that is easy to understand. Clear claims as quickly as possible. Track the value and frequency of claims. Determine what causes claims to occur in the first place and fix the root causes to keep cash flowing and customers satisfied.

Disputes can wreak havoc upon a company by increasing payment delinquencies, decreasing revenue and profits through elevated levels of credits and allowances, causing customer dissatisfaction, and lowering productivity within your collections department. As such, dispute management has become a valuable practice and necessitates taking appropriate actions to identify, resolve, and clear these disputes quickly and accurately when they occur.

RESOLVING DISPUTED ITEMS

Disputes should typically be routed back to the department that is most likely responsible for the creation of the dispute. They are in the best position to understand the dispute, resolve it, and set up protocols to reduce the potential of the dispute-inducing issue to reoccur.

Establish an amount of time within which a dispute should be researched and resolved. Setting a standard provides a base for how individuals, departments, and the organization as a whole should be measured in regard to dispute management performance.

Implement a process for tracking and coding all disputes. This will help ensure that all disputes are followed through to resolution and none are inadvertently dropped and forgotten. Tag all disputes by unique, distinct codes that identify the dispute by type and root cause. Not only will this assist in the ongoing resolution process, but such coding will aid in measuring the levels of activity among particular dispute types, flagging those with high occurrence for attention in order to prevent them in the future by addressing the source.

Analyze the volume of disputes by type as well as the performance at individual, departmental, and organizational levels. Measurements of dispute management performance should be made to provide accountability throughout the organization. Observe metrics such as cycle time from dispute identification to closure; number and value of disputes recorded versus disputes cleared; unresolved disputes in aging categories; and ultimate outcome of disputes in terms of revenue received via cash or credit.

Once you have implemented a streamlined dispute management process and created a system of tracking and measurement, the next vital component is ensuring all such information is shared throughout all functional boundaries. Good information systems are paramount when transaction and dispute volumes are substantial.

Additionally, by having information available via an intranet program or desktop solution, all appropriate personnel can have access to information on disputes, as well as reporting and analysis, thus speeding up the research process. Employees will also be able to see and share all related transactional data and supporting documents. Creating such an open and collaborative environment allows for a more efficient system for dispute management.

Technology and automation can play a major role in the success of a collection department’s dispute resolution process. Because a high volume of dispute transactions can greatly impact collections, having an efficient system tool to route, categorize, track, and report disputes automatically can have a huge influence on productivity, reducing the time employees spend on clerical tasks.

Finally, foster an attitude throughout the company that dispute resolution is not simply a collection process, but rather a customer service activity that will lead to greater customer satisfaction. Support by the senior management team will reinforce this mission.

By committing to this philosophy, corporations will recover savings in improved DSO, reduced credits and write-offs, and lower operational costs, as well as ultimately improving customer satisfaction and retention.

If your company is heavily weighted to a paper system, investing in a system that stores documents, e-mails, and approval forms electronically will greatly reduce time invested in finding and replicating necessary forms.

ACCOUNTS RECEIVABLE STANDARDS

The following table provides suggested accounts receivable standards.

COLLECTIONS

It doesn’t matter how good your organization’s products or services are—or how proficient your sales team is—if you don’t get paid for what you deliver.

Collections, as a meaningful source of cash, significantly impact cash flow. In normal situations, most customers pay their bills, satisfying their debt in a timely manner. However, there are always those customers that do not.

According to the National Association of Credit Management (NACM), after three months of accounts receivables going uncollected, one dollar depreciates to 87 cents, then to 67 cents after six months, and 46 cents after a year in terms of the likelihood of collecting.

Additionally, Dun & Bradstreet reports that a business files for bankruptcy every eight minutes, and one closes every three minutes. Therefore, it is paramount to employ practices that can ensure collection of outstanding invoices as quickly as possible.

An effective collections plan should comprise a regularly updated system that flags overdue accounts, a set of internal procedures to handle slow-paying customers, and a process by which managers receive regular updates that identify slow-paying customers.

As with any other business process, the collections plan should be reviewed regularly for needed improvements. One of the best ways to ensure your organization is paid on time is to make sure the invoice is correct and is delivered in a timely manner. While this seems elementary, in many instances invoices are not paid because of errors or perceived errors (e.g., billing sales tax to an exempt organization, adding shipping/handling when your agreement indicates not to include it, etc.).

Collection activities always should follow the company’s policy guidelines and adhere to all laws and professional standards, and should be undertaken for all accounts past due and applied consistently.

COLLECTION METHODS

To collect what is owed them, companies employ several methods, depending on circumstances, the amount owed, their industry, and other factors. These methods include:

• Statements and letters;
• Telephone calls;
• Short pays and deductions;
• Collection agencies; and
• Write-offs in collections.

Following are additional practices and tools that can help successful collection of accounts:

1. Approach a higher-level person. When collecting from a difficult customer, you may have to go higher than the customer’s accounts payable—for example, to the controller or CFO.
2. Offer payment options. Two options are accepting payment on a credit card or taking a partial payment and setting up a payment plan.
3. Research open orders. Check with your own AP department. Does your company owe the customer? If so, place a hold on the payment, or apply the payment against the customer’s outstanding balance.
4. Cut your losses. Decide when the cost of collection outweighs the benefit of the collection and be prepared to write-off small dollar amounts.
5. Revamp when a troubled customer returns to financial health. Ask the customer to pay off the amount written off, and then require the customer to pay as they go for a period of time (e.g., six months). If all goes well, consider a small line of credit again and keep a close eye on the account until you have confidence in extending more credit.
6. Improve relations with the sales department. Ask for help in resolving discrepancies—remind sales that issues can be resolved easily and without loss of future business with sales involvement.
7. Update the sales department on potential credit holds with key accounts. Give sales a chance to resolve issues before the credit hold.
8. Be more proactive than reactive. What have been the customer’s past reasons for nonpayment? Research the customer’s history before calling; stay on top of them; move them to another form of payment.
9. Don’t wait until a bill is 30 days past due, only wait 5-7 days. If the customer is pushing the terms, a call shortly after the due date will let them know this is not a practice you will accept. You will also learn if there are any problems with the invoice and be able to research it, resolve it, and get payment.

AP will usually ignore any invoice that has an issue and see it as justification for nonpayment. If you wait too long to call, it is more difficult to trace the history of the shipments and can result in writing it off to bad debt.

PRICING STRATEGY

Discounts have their place, but more often than not, they are used incorrectly. Prior to offering a discount, controllers involved with establishing pricing strategy need to take the following steps:¹²

Understand your business economics. If you have a 15 percent profit margin and for a period of time you are willing to give up a third of the margin to offer a discount, that may be a correct business decision. However, if you have a 15 percent margin, and for a period of time you give up an amount equal to 150 percent of the margin to offer a discount, that approach will hurt your business.

Establish the discount duration. Discounts should have a finite life. If they continue into perpetuity, you are just resetting price with the word “discount.” A discount is simply a marketing tool—a program that is planned, fielded, and completed. At a certain point, once the program ends, it is important to calculate the return on marketing investment received in order to understand whether the expense was worthwhile.

Understand the client’s needs. Some clients are driven by the word “discount.” In this situation, you should find the price that allows you to achieve your required returns, and increase the price of the product/service by the discount you will be giving. There are three types of discounts that work, as they benefit each party in the transaction:

1. Discount to try your product or service. For a service, this includes discount pricing while the service provider gains the required knowledge to provide the client with the maximum service possible. During the early days of a relationship, a client should not be asked to pay full price, while you learn their business. For products, a discount provides an incentive for consumers to try your product vs. staying with their usual selection.
2. Discounts provided to clients based on their purchase volume, i.e., relationship pricing. The philosophy behind this type of discount is as follows: If I can count on you to purchase 10 units of my product or service, I will charge you full price. But as you purchase more, I can take advantage of economies of scale, which I can pass on to you.
3. Discounts provided for early payments. To incentivize early payment, it is common to offer a benefit (discount) to consumers. Receipt of your money sooner rather than later is worth the customary 2 to 3 percent in discount. But if your profit margins are already razor thin, simply raise the price by the discount amount. Billing and applying the discount will result in the attainment of your profit requirements.

Whichever type of discount is used, the greatest responsibility of the manufacturer/service provider is to clearly communicate the discount terms and when they will expire. If you implement a discount to benefit the client but the discount goes away prior to when the customer was expecting it to expire, the relationship will be disrupted, and the discount expense will be to no avail.

THREE COMMON DISCOUNTING ERRORS

Controllers need to be aware of the following three common errors when offering discount pricing:¹³

1. Offering a discount to customers to entice them to pay their late bills. The message you relay here is, Do not pay on time and I will reduce your price.
2. Offering a discount to match the competitor’s price. This approach assumes your economics are the same as those of your competitor. That assumption is often very wrong. For example the competitor may be giving up a piece of their margin, while you may be giving up your entire margin.
3. Offering a discount on one product or set and losing money, expecting to make it up in other products/services. In some situations, one product is heavily discounted while other products are premium-priced. The goal is to lose money on a few items in order to entice the client to also buy others, while making a higher margin on those other products/services.

However, this approach will always backfire when you work with clients who understand the market price. They will understand where to focus their purchasing, for example, only on the lower-priced products.

Ensure that your value proposition is strong. Customers should seek out your company because the value you provide exceeds the cost of cost of doing business with you. To achieve this:

• Always calculate the projected cost of the discount to the company prior to implementing.
• Consider a key performance indicator that measures discount usage and report on it.
• Ensure that discounted sales are booked separately from non-discounted sales, so discount usage is clearly quantifiable.

AUTOMATION

Controllers are wise to invest in technology that not only improves customer experiences but also drives more efficient service delivery. This includes mobile applications for e-commerce as well as remote diagnostic tools that automate labor-intensive customer-support functions.

To successfully implement automation solutions, controllers and AR should adopt the following step-by-step approach:

Perform a rigorous needs analysis. Before approaching vendors, develop a full-blown needs analysis definition. This will serve as the blueprint to guide the entire project. Defining hardware and software requirements is just the beginning. Assess how activities are currently being performed in the AR/credit department. What information do you need? What data are other departments requesting? How long does it take to respond? What processes should be revamped before an automated system is implemented?

Develop a Request for Proposal (RFP). Provide an overview of your business and list your functional needs. List specific questions relevant to your needs and specify the form and timing of the response expected. Compile a checklist of tools and capabilities you require from the product.

Conduct a careful vendor selection. The receivables/credit market is crowded with vendors. Go with a time-tested vendor. Require the vendor to demonstrate that its software can perform. Request that your own company data be used in demonstrating the product. Competing systems typically offer similar features. The key differentiator is the quality of vendor support—including training your staff.

Invite a short list of vendors to demonstrate their products. Do reference checks and obtain feedback from actual users in the field (from similar companies to yours using the same software). Talk to your counterparts at other companies about the software and the vendor’s support.

Request sufficient resources. Software implementations inevitably take more time and resources than expected. Assign dedicated resources, such as a full-time project manager and team. Trying to squeeze in a major implementation while project members carry on their normal duties can be a major obstacle to success. Lack of adequate IT resources is often a major cause of implementation failure for such projects.

Choose an integrated system. Selecting a system that’s integrated with other company systems—including your ERP system—is very important. If your AR system doesn’t interface with the general ledger, for example, the data you enter in one system will have to be re-entered in the other. This will not only make duplicate work for the staff but can also provide inaccurate information in certain cases.

Don’t customize “off-the-shelf” solutions. Many users warn against modifying the software to suit your processes. Customizing the software can get expensive. Software updates can also be hindered. Customization will most likely require an expensive consultant visit to reconfigure your system every time there is an upgrade.

A smarter option is to go through your AR processes to see if you can change the process to fit the standard version of the software you pick.

Get an up-front commitment. Whenever there is a change in a process, get buy-in from those who will be affected. You also need the backing of top management to empower your project team.

Consider the future. Don’t just think of the here and now when selecting a new AR solution. Your company is going to change and grow. Choose a solution that is scalable so that it will serve your needs in the future.

Tap into outside consultants. Bringing in an outside consultant to help with automation projects is a good idea unless your company has solid experience in selecting and implementing new systems. The AR software market is full of new vendors, so a consultant who follows the market can more quickly sort through them.

Consultants may have relationships with certain vendors and always recommend and install the same software, so employ a genuine independent.