In the News
February 22, 2018
Order-to-Cash Extends Beyond Credit Manager’s Role
Credit managers often associate the order-to-cash (OTC) cycle solely with their management teams in the finance department, which is appropriate considering it involves customer payments from the moment requests are made to the end of the transaction. As defined by Anachron BV/Order2Cash Marketing Manager Damian Leslie in an FCIB webinar, the cycle is a business’ process of receiving and fulfilling customer requests for goods and services, one that is broken into several subprocesses.
It is true that creditors play a substantial role in OTC, but Leslie said it’s how they communicate with others in their department that is most important. During the members-only webinar on Feb. 15, Leslie said there are some departments that are not usually considered as “operating within the finance department,” including marketing, sales, legal, order processing and customer service.
Subprocesses begin when the finance department assigns roles to these specific areas, divvying up parts of the cycle. Doing so can create what Leslie called “silos” within the finance department, such as risk management, billing and invoicing, credit management and collections, that operate in different ways.
“They can often examine different datasets and yet they all work within the same overall process and [they’re] involved in the same orders,” Leslie said. “Siloing information in this manner creates its own hidden barriers and stops the communication flow within your organization.”
When this occurs, work may be repeated and cause delays and/or disrupt customer engagement. Each department’s role can affect and, therefore, influence the neighboring department, he said.
Relationship building is an essential aspect of OTC, said Gartner Client Financial Services Managing Vice President Paul Kindred in an interview with NACM. Beginning his career with Gartner as a credit manager in Europe, Kindred said he’s spent the past two decades in the U.S., where he started as credit manager for the company’s North American receivables and now handles global operations out of Fort Myers, Florida.
“The whole OTC cycle was completely fractured—broken relationships all around” when he came to the U.S., Kindred said. “So, I took over the order management and invoicing for all of our revenue streams, and centralized the operations adding to the collections responsibility. All the collections I’ve automated are done through my team, so I know the cycle pretty well.”
In his experience, he said, OTC is the “life, soul and heartbeat” of an entire organization. Credit managers rely on everyone—sales to make sure client records are up-to-date and accurate, production services to make sure products and services are shipped and delivered, as well as the tax team to make sure the right tax strategies are implemented when conducting business internationally.
“What I found most important is that my order management team understands the impacts that they make on everybody else in the organization,” Kindred said. “Collections have got to be working closely with order management and sales; those three areas have to be joined at the hip to make sure they give the customer the right experience that they’re expecting from an administrative point of view and maintain healthy cash flow.”
– Andrew Michaels, editorial associate
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27025. Conflict Resolution—Breaking Down Communication Silos
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Why Creditors Should Watch Out for Fast-Expanding SMBs
With high levels of optimism in a flourishing U.S. economy, small- and medium-sized businesses (SMBs) across numerous industries are looking to expand their operations. Aggressive expansion isn’t necessarily a bad thing, said Euler Hermes North Americas Chief Economist Dan North in an interview with NACM, but the rate at which SMBs expand can potentially spell trouble for creditors who are backing those businesses.
Earlier this month, the trade credit insurer reported a positive outlook for U.S. gross domestic product (GDP) growth in 2018 at a rate of 2.6%—an increase of nearly half a percent from last year. According to North, Euler Hermes might increase its predicted rate, which was reinforced by the Institute of Supply Management’s Manufacturing index that estimated a steady supply of activity through the year.
The pace of expansion, however, can be concerning for creditors when SMBs expand too fast and “outgrow themselves,” North said. Creditors must be aware of the potential warning signs, such as when businesses start to produce and sell more goods every month, in turn, costing themselves more money. For example, a business could very well purchase 100 widgets one month, 120 the following month and 150 the month after that.
“Money is going out the door, but they don’t collect the receivables fast enough. Cash flow turns negative and they can go bankrupt,” North said. “[Creditors] need to stay on top of the financials because … if [businesses] don’t collect on the receivables, they start slowing down payments going out. That’s always your first bit of evidence.”
Reasons behind SMBs’ inability to keep up with receivables collections vary, he said. Sometimes, it’s because businesses don’t realize just how fast they’re producing and selling, and other times, it’s a lack of available personnel. With product flying out the door, businesses don’t necessarily connect the dots that their receivables might not be due for 30 or 60 days. Then, their cash flow goes in the opposite direction.
In his experience, North said suppliers are typically the last to receive payment. Businesses are always eager to pay back their bank, and if you’re lower on the totem pole from their perspective, they could “drag out” payment.
Staying alert to businesses’ financials also means watching for signs of insolvency, North added. Overall, the number of insolvencies has declined over the past decade since the recession—a number which North said is “bottoming out.” Unlike previous years when the decline was at 10% or 15%, the number of insolvencies and bankruptcy filings are predicted to fall to about 2%, increasing the risk of bankruptcies.
“There’s a little bit of confusion that sometimes small businesses are the ones that fail more frequently when it’s really new businesses; they’re not necessarily the same thing,” North said, defining a new business as one created within the last year.
Manufacturing and homebuilding are among sectors in high demand. North explained he has seen SMBs in these sectors looking or beginning to expand at rapid rates in what he predicts will be a “very solid year.”
– Andrew Michaels, editorial associate
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Washington Contractor in Receivership; Hundreds Await Payment
Hundreds of creditors await payment from a Washington contractor, which has recently filed for receivership. Vandervert Construction entered financial distress during the last eight months or so when it began falling behind on payments to subcontractors and vendors, according to the Spokesman-Review out of Spokane.
“It is hoped that through receivership the employees, subcontractors, vendors and clients that provided support and contributed to the success of Vandervert Construction will receive payment for monies owed and the impact of Vandervert Construction’s financial situation and closure will be minimized,” said a statement from the firm, released in the Spokesman-Review.
According to Spokane County Superior Court records, there are 350 creditors across 13 states and Canada who are owed more than $18 million, said an article with the Spokane Journal of Business. The financial distress is due to cost overruns at several hotels in the Pacific Northwest, said Vandervert. Price changes to subcontractor bids and employee turnover were also mentioned as causes. These hotel projects caused Vandervert to lose more than $14 million.
Idaho-based Innovative Electrical Solutions has placed nine liens on Vandervert properties, and owner Aaron Kayser told the Spokane Journal he’s owed $144,000 and has already laid off workers. He does not expect to ever see that money.
Construction creditors supplying materials to Washington projects need to be aware of the different statutory requirements to serve notices and file liens. A notice of right to claim of lien must be served to the owner and contractor within 60 days of first furnishing of materials on commercial or multi-family projects and within 10 days on single-family projects, according to NACM’s Secured Transaction Services (STS). In Washington, it is important to remember contractors and subcontractors must be registered to have lien rights. If a supplier sells to an unregistered contractor or sub, they will lose lien rights as well.
A lien must be filed within 90 days of last furnishing, and the owner must be served within 14 days of its recording. Suppliers have eight months to foreclose on the lien should they remain unpaid.
STS and NACM Commercial Services will sponsor several webinars on construction in the region. There is one on Oregon lien law March 7 and one on Washington March 21. A combined webinar on Idaho and Montana lien and bond laws is scheduled for April 4. Click here for more information.
– Michael Miller, managing editor
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Canada Looks to the Future of Payments
Canada is trying to revolutionize the payments landscape. According to a recent study by Payments Canada and EY Canada, payment processing costs businesses between 3 and 6.5 billion Canadian dollars ($2.4 and $5.1 billion) annually.
“The modernization of Canada’s payment systems—specifically the introduction of faster, safer and more data-rich payments—will bring highly efficient options to Canadian businesses that will lower operational costs and boost bottom line returns over time,” said Gerry Gaetz, Payments Canada president and CEO.
The report found several factors causing issues for business payments. They include: using manual processes and legacy technology; limited cash inflow and outflow predictability; poor supply chain and collections visibility; and tracking difficulties with cross-border payments.
Payments Canada and EY Canada cite the ISO 20022 messaging system as a way to improve payment automation and efficiency for electronic funds transfers (EFTs). Faster payments will help business-to-business operations with just-in-time supplier payments, overdraft payments and ship-upon-payment contracts, said the report. Many countries across the globe already have real-time capability, including Australia, which saw the New Payments Platform launch this month. Canada is among the many countries investigating real-time capability, which also includes most of Western Europe and the United States.
Improvements for different payment types, such as EFTs, seem logical since the use of checks continues to decline in Canada. According to the report, check usage dropped 9% in 2016, while EFT grew by 4% annually from 2011 to 2016. Business credit cards also skyrocketed, up 40% since 2011. However, commercial payments still see a large value of checks due to the current message standards, and it is “the only way a business can attach the remittance information with the payment itself for ease of reconciliation at the other end,” said the report.
Issues with remittances causing collections problems can cost businesses CA$600,000 per year, said the report. Cross-border payments have also been studied by Payments Canada and EY Canada. It is said international brokers can cost between CA$7,500 and CA$112,500 per year to help manage traceability of payments with different messaging requirements. All five business issues in the report could see costs reduced by CA$14.2 billion on the low end and CA$ 31.9 billion on the high end over five years.
Businesses in Canada can benefit from the potential payment infrastructure in many ways, according to the report. Among them are operational risk reduction, an increased ability for cross-border business and a simplification of the payment process. “By modernizing and building a scalable, future-oriented payments infrastructure, Canada will continue to promote innovation and strengthen its competitive position in the global economy,” said Ron Stokes, partner and fintech leader with EY Canada, in a release.
– Michael Miller, managing editor
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