Accounts Receivable Outsourcing: A CFO’s Secret Weapon
Let’s start this article with a question; how much does your business outsource already?
The reflex response to this is normally: very little. However, the truth tends to be far from that. How do your customers receive their goods or invoices? Do you deliver these by hand? Do you have a company delivery fleet?
The list goes on. In fact, we’ve dedicated a whole section to what every business outsources and forgets they outsource. As we’ll see, it just makes more sense to leverage external economies of scale and expertise at times.
So, back to the central topic. Outsourcing accounts receivable (AR) to a managed service provider may not be top of every CFO’s list of objectives, but there’s good reason to reconsider this priority to streamline processes and free up resources to focus on business objectives.
We look at how outsourcing accounts receivable fits well into the existing mix of services businesses already outsource, why common objections are misplaced and how businesses can go beyond standard business process outsourcing (BPO) to fix their DSO and liberate working capital for more strategic allocation.
Challenges facing CFOs in 2022
The year 2022 presents a unique mix of challenges for CFOs. We explore some of these in more detail in an article on how CFOs are navigating the financial challenges of 2022. But, for the sake of brevity, we’ll consider these here as two distinct sets of challenges: people challenges and financial challenges.
People challenges
It’s no secret, there is a recruitment crisis. As staff participate in the great resignation, businesses lack applicants for roles; for instance, the UK had approximately 1.5 openings for every unemployed person in January 2022.
Taking the example of a strategic objective such as holistic cash forecasting, the top people challenge is a lack of internal talent and/or bandwidth to understand how to do this well – according to a recent study conducted by Forrester Consulting, on behalf of Corcentric.
Things don’t look much better from the perspective of accounts receivable staffing. A quick glance at LinkedIn shows that there are 2,950 results for accounts receivable (AR) jobs in the UK – as of early June 2022!
These skills gaps are unlikely to close fast, so businesses need to explore alternative solutions, such as outsourcing to a managed service provider.
Financial challenges
Bookkeeping during the pandemic has highlighted the cash flow challenges of market downturns and supply chain disruption. When markets become less predictable, CFOs may instinctively look to increase liquidity. But trying to do this in a pandemic, businesses are hampered by working capital being tied up in higher days sales outstanding (DSO), as customers demand longer payment timeframes, or take longer to pay.
It’s not just liquidity for the sake of financial security that sits high up the financial priorities this year. There’s a pressing need for more cash now to capitalize on growth opportunities to meet evolving customer demands.
With the above challenges in mind, it’s easy to see why cash flow forecasting is ever more important to support strategic decisions with financial backing. However, few businesses have the level of automation and associated data across accounts receivable and accounts payable cash flow silos to do this with complete confidence. How well is your business uniting the cash flow silos of AR and AP for strategic advantage?
What every business outsources and forgets they outsource
Whether small business, start-up, mid-market or enterprise, the vast majority of businesses outsource many different things. Few businesses can justify full-time employment for staff to handle every single aspect of their operations, delivery, and upkeep.
Here are some of the most obvious areas where businesses already outsource.
Postal service – you don’t deliver letters and goods by hand, do you? Business-critical and sensitive documents are frequently handed over to outsourced delivery services, such as the royal mail, DPD, and Hermes. Few businesses would quibble about the risks involved in doing this. For those who need a little reassurance, tracked and signed-for deliveries provide businesses with visibility into who received what and when.
Cleaning – do you recruit, train, manage, and scale a team of cleaners up-and-down as needed? Most businesses would employ a cleaning firm to meet these demands, with the confidence that there will be a job well done, without the need to get directly involved.
Recruitment – it’s likely that you meet with specialists who can save you the leg-work of filtering candidates down to those you really want to meet.
Transport – it’s likely we’ve all taken a train, taxi or aeroplane at some point for work. It’s not always appropriate to drive yourself from A to B. Sometimes it’s more efficient to let others take the strain of vehicle purchase and upkeep as well as actually driving/flying you from A to B. You can simply request transport at a time you need it, then request it for your return.
Businesses simply don’t have the time, or need, to become experts in areas that are not central to their operations. The most successful businesses know their core expertise and do everything they can to focus on this without the distraction of maintaining peripheral services.
Business process outsourcing (BPO) and shared service centres
Back in the 1980’s businesses strived to implement decentralisation. It was a popular mantra espoused by the majority of business consultants at the time. Ford was one of the first to apply this mantra to create shared service centres (SSCs) in the 1980s, with businesses like Whirlpool, Intel,and Allergen following Ford’s lead in the 1990s. It is now estimated (in this guide by Deloitte) that over 80% of Fortune 500 businesses have shared service structures and this continues to grow. Shared service centres have become best practice in enterprise process architecture.
When first conceived, the focus of shared service centres was primarily to achieve economies of scale through the centralisation of (paper-based) transactional document creation and processing (of which invoices were a key component).
These days, the emphasis is on alignment of administrative processes and the potential for headcount reduction through process improvement initiatives. For businesses above a certain size, it’s simply more efficient for each office to rely on a centralised team of specialists for certain functions.
Back-office functions, such as human resources, IT, and accounting services are relatively easy to share across different aspects of the wider business. Each regional office hooks into the shared service, providing them with enough work to employ staff who would otherwise be part-time employees if just working for one aspect of the wider business.
In much the same way, businesses may decide that these shared services could reside outside the walls of the business. Leveraging BPO may seem functionally equivalent to leveraging a shared service centre to end users.
The UK BPO services market had total revenue of $15.6bn in 2020, representing a compound annual growth rate (CAGR) of 6.6% between 2016 and 2020 according to this article by Market Research.com. The same article also indicates that the impact of the COVID-19 pandemic did nothing to dent this growth, as the UK BPO service market grew by 11.7% in 2020.
The demand for external collaboration is perhaps most dramatic when considering current financial priorities. For instance, 85% of companies (across a sample comprising US, UK, and French companies) are engaging or plan to engage a managed service provider to guide their efforts when trying to achieve holistic cash forecasting across AR and AP – according to a recent study conducted by Forrester Consulting, on behalf of Corcentric.
Outsourcing vs. DIY (in-house) accounts receivable
Even if there were compelling reasons to take the do-it-yourself (DIY) route for all your accounts receivable processes, the fact that there are over 2,500 open positions for AR employees in June 2022 implies it will be hard to recruit and retain skills to manage and scale this in the current jobs market.
Medium-sized businesses and above, particularly those with multiple satellite offices, are likely to benefit from a shared service centre approach to making back-office know how available across the business. This shared service centre approach translated well into business process outsourcing (BPO) for the same services. Let’s explore the arguments for and against.
Common arguments for going the DIY route for AR
Greater agility – some businesses believe that in-house teams are likely to respond to change requests faster. The reality is that communication with an internal team is likely to use the same channels as communicating with an outsourced service provider. If this is a genuine concern, outsourced service providers can be held to acceptable response terms via an SLA. With a managed service (Managed Services) provider, you can even experience real-time control and visibility into an outsourced service. How many times have internal IT resources taken longer to respond to a change request than you would like? Does having a team in-house really make that much difference?
Better visibility and control – allowing another business to manage sensitive information, such as billing details, can trigger concern for some. However, when you send an important document (e.g. a paper invoice) by post, you are relinquishing control too. This all comes down to selecting a service provider you can trust. How can they demonstrate credibility, through who they currently work with, and how can they provide you with the visibility into status that will reassure you?
Security and compliance – relating to the previous point about trust and credibility, some businesses may have need for specific risk management criteria to be met to comply with legislation or customer security commitments. Selecting a service provider who can meet your security requirements may require careful evaluation, but specifics can be agreed to and set out in an SLA to ensure ongoing compliance.
Advantages of outsourcing AR
Outsource the risk and retain the control – the control remains within the business, as the business dictates the requirements, and the outsource partner provides assurances by way of contractual obligations and service-level agreements.
Focus on your business without distraction – few businesses would consider the AR process as central to their operations, so why get bogged down with the time and effort to recruit, train, and manage staff for this, as well as supporting technology and delivery overheads. Outsource AR so you can focus on more profitable activities.
Reduce overheads – staff, technology, and delivery overheads add up; outsource AR to benefit from economies of scale and drive these costs down.
Leverage best practices – with the right outsourced service provider, you can be assured that invoices will go out accurately and on time, and the collections process will be courteous and considerate, but effective. Don’t waste time trying to keep up with best practice and evolving invoice delivery requirements, simply outsource this headache and allow your partner to carry the load.
Enhance customer experience – keeping up with the increasing number of invoicing portals AR needs to upload invoices to, or formats customers require their invoices in, can be a full time job. Outsource this headache and streamline your workflow.
Scale rapidly – outsourced service providers are likely to utilise automation to optimize delivery accuracy and speed. This means that short-term fluctuations in demand can easily be accommodated, and longer term scaling is not going to result in staff shortages or systems overload.
Financial reports from outsourced accounts receivable
Outsourcing accounts receivable should never mean a loss of oversight into AR performance. After all, these are your customers – you need to understand when there are payment delays, queries, and other exceptions.
Financial statements, reports, and other financial data should be shared regularly with your finance department, so assessments can be made and changes to credit limits and payment timeframes can be applied on a dynamic basis to maximise sales and limit risk.
Your accounting team need to retain oversight of cash flow and payment status in order to operate effective accounting services. Accounts receivable provides the cash inflow to support the wider business, so outsourced or not, information about cash flow needs to flow freely into the accounting team.
Outsourcing accounts receivable needs to be paired with carefully structured financial data flow back into the business to support cash flow forecasting and real-time insight into payment status.
KPIs to measure when outsourcing AR
The success of any AR outsourcing project should be measured through benchmarking important KPIs ahead of outsourcing, such as DSO, days beyond terms, delinquency, aged debt, and other AR metrics.
Ultimately, AR outsourcing should both improve bottom-line spend through a reduction of AR overheads and enhance AR performance against the aforementioned KPIs. Even enhanced customer experience can be tracked through improved net promoter scores.
Other benefits of AR outsourcing, such as improved scalability, less management distraction, and lower demands on customer service teams may be harder to track, but still contribute to the overall value of outsourced AR.
Beyond outsourcing – fix your DSO
Outsourcing your accounts receivable process may well improve performance for important AR metrics and associated KPIs, but it is the impact on cash flow that is likely to be of highest value to a CFO.
Improved AR performance can improve the speed and accuracy of invoices reaching customers and result in faster payments, driving down DSO. However, this is an incremental improvement and subject to uncontrollable factors, such as customers’ ability to pay and market factors driving longer payment terms (e.g. selling into a new market).
Wouldn’t it be wonderful if outsourced AR could also guarantee a fixed DSO of a specific number of days? Imagine the amount of working capital liberated if you brought your DSO down to just 15 days for instance?
Well… this is exactly what Corcentric Managed Accounts Receivable offers. Our managed service provides a guaranteed payment on your preferred number of days after invoicing, regardless of the payment terms you afford your customer. So you can accommodate customer demands for longer payment terms, whilst lowering your DSO and guaranteeing payments each month.
Furthermore Corcentric Managed AR is provides funds payments on a non-recourse basis, meaning that if customers pay late, or even don’t pay at all, you don’t incur any extra fee. Once Corcentric pays you, that’s it. Your payment is yours to keep.
Find out how Corcentric Managed AR has helped Daimler drive their DSO down from 37 days to 15 days and liberate a significant amount of working capital. Keep an eye out for our next webinar on driving down DSO through Managed Accounts Receivable here.