CASH FLOW IMPROVEMENT
With GBM's single rate factor throughout the year, your cash flow for employment related items is even and predictable. Unemployment taxes are spread out evenly throughout the year instead of coming due primarily at the end of the first quarter, and workers' compensation premiums are paid as the wages are paid instead of being heavily front loaded at policy renewal time. There are also no surprises at the end of the policy year, when an audit of your workers' compensation policy may reveal further liability of thousands of dollars. With the GBM system, you pay as you go, pay evenly throughout the year, and you are never charged for anything other than amounts due, based on the rate factor, with your payroll invoice. Cash flow worries related to payroll and employment items are a thing of the past.
Roadmap to Cash Flow Improvement
What is slowing cash flow?
Cash flow delays are almost always related to disputes about the facts. Recently we analyzed the
sources of credit memos for a leading independent retail and distribution client in
found that customer disagreements with internal data accounted for 65% of the 16,000 credit memos
issued each month.
Order‐to‐cash issues are cash flow issues. Therefore, the elimination of disagreements about the order fulfillment facts will improve on‐time payments and reduce the cost of rework. Cash flow is the
cycle time and quality of the conversion of actual or forecasted consumer demand on your customer
to cash for you.
We measure cash flow in two ways, Cash Flow Cycle Time and Cash Flow Realization. Cash Flow
Cycle Time is the time between when demand occurs and cash is received. Cash Flow Realization
refers to the percentage of demand converted to cash.
Unfortunately most consumer products companies are not doing a very good job at seeing demand
prior to order creation. Cash flow is easiest to see and measure once demand becomes an order. For this reason, this article, which will be the first in a series discussing cash flow concepts, will bypass
the demand management opportunities to improve cash flow and focus on the areas most easily
measured in the organization.
Both cash flow measures are apparent once demand becomes an order. This process is called order‐to‐cash (OTC) and it consists of processes associated with the sale and delivery of products and/or services. These include order management, credit analysis and approval, invoice and billing, cash
collections, dispute resolution, cash application, and financial analysis and reporting.
ERP applications address the accounting within the order‐to‐cash process. They can tell you that you are doing a great job or doing a terrible job. They point out that you have many credit memos or few
credit memos. They calculate that your DSO is 75 or 35. They have a copy of what your company
believes to be the truth.
The difference between what your company believes to be true and what the customer believes to be
true is the source of a majority of cash flow challenges. For this reason, the ERP system that only
holds your side of the truth will be incapable of preventing the vast majority of cash flow problems.
What are the benefits?
According to Gartner, the #1 issue facing manufacturers and wholesalers is maximizing cash flow.
Your company needs to free cash to make strategic investments in new products, new markets,
service debt, and acquisitions. For consumer products companies, the most effective way to improve cash flow is by optimizing order‐to‐cash processes:
For a $4 billion company, every day of sales outstanding represents $10 million in cash flow.
Typically 20‐35% of the effort in OTC processes is non‐value added.
The potential for improvement is high.
How can cash flow be improved?
It is certainly true that the term “Consumer Products” is applied across a wide spectrum of
sub‐industries. It is also likely that your company is different, not only from the industry but, from other companies in its sub‐industry.
Our experience indicates that broad generalizations about the industry give no actionable indication
about the detailed solutions necessary to address a given organization’s challenges.
What we have found is that a proven framework with roots back to Total Quality Management is enough to anchor abusiness process centric approach to solving specific problems. While the framework is simple, the art lies in the application of the framework to the detail.
Cash flow will be improved by:
Prevention of causes of disputes
Detection and measurement of dispute indications
Efficient processing of disputes
Three recent Quality Deployment projects illustrate how these results can be achieved.
Preventing disputes through item synchronization: A global hard goods manufacturer was under
tremendous profitability pressure from their largest customers. They were seeing unauthorized invoice deductions, excess inventory and ineffective transportation utilization. Cash was coming in slowly and was less than planned.
By integrating product line items, pricing, promotions, and discounts with leading customers, the
problems were addressed and disputes prevented. This was accomplished in 12 short weeks.
The integration resulted in savings of $2 million in credit memos and millions in cash flow. It prevented disputes that caused the credit memos and short‐pays, increasing revenues collected. It also
eliminated the time and cost involved in investigating and resolving disputes.
Preventing disputes by integrating business processes across enterprises provided other cash flow
benefits as a by‐product of the synchronization. Other benefits included:
$217,000 reduction in sales force time handling item data
$278,000 reduction in
$33,000 cost reduction in purchasing
$39,000 increase in net profits due to fewer stock outages
$198,000 reduction in time to reconcile invoices
$124,000 reduction in outbound logistics
35 days of extra sales on new items ($1,090,000) due to accelerated speed‐to‐shelf
Detection and measurement of disputes through visibility: In a recent order‐to‐cash initiative, a
consumer products client was experiencing margin‐killing penalties for late and incorrect shipments.
An order visibility and process improvement effort was initiated.
The fulfillment process was modeled and business process management and business activity
monitoring were put in place to monitor and improve that process. The enhancements overlaid the
existing legacy systems and were implemented with minimal impact to those systems.
The net result: 90% reduction in payment penalties and a reduction of $75K per month in carrying
costs.
Efficient dispute processing through case management: Those disputes that cannot be prevented must be managed. The
architecture to manage the disputes for £2 billion in collections.
Funds were not getting collected because the process that generated the receivable was rife with data and process defects. Errors prevented a clean hand‐off across organizational silos and resulted in
large numbers of stuck receivables. Like most of our CPG clients, the massive legacy systems had to remain in place.
Business processes were deployed to manage and measure receivable cases. Quality Deployment
automated rule processes at each hand‐off point. Batch jobs were replaced with real‐time processes
to eliminate processing lags. In addition, new tools monitored workload and directed new tasks
accordingly. The end result? 100% elimination of stuck receivables, with 90% reduction in write‐off for bad debt and 90% increase in productivity.
How does the roadmap begin?
Each of these projects began with a short analysis of the order‐to‐cash process by a team with
industry depth, technology breadth and implementation experience. The analysis targeted those areas where improvements could yield large gains.
A business case was built and outcomes achieved in a short period. Pareto was right, 80% of the
value is gained with 20% of the effort. By focusing on the 80%, the value to cost ratio of these projects is outstanding.
For properly equipped teams, the improvements delivered in these cases are straight forward and repeatable.
