Unlock Efficiencies in the Order-to-Cash CycleBest Practices in Accounts Receivable Reconciliation

April 2011 by Mickey Vonckx, Head of Sales Europe, Hanse Orga International B.V.

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Introduction

In the past, account reconciliation and cash application was often viewed as a rather administrative task and not as a key function within a strategic process. However, with the recent financial crisis, companies were forced to reassess this point of view. While banks were cutting down credits, the insolvency risk and payment behaviour of clients further worsened the situation. In this challenging environment, companies were forced to focus on their own situation and unlock tied-up cash potential within their own accounts. This potential is much larger than many companies realise today.

To unlock this optimisation potential, companies need to adopt best practices for automatic cash application. By implementing these improvements, companies benefit from unparalleled levels of efficiency, an auditable process and faster and more reliable sources of information about its cash situation. They are able to actively drive DSO down. High-risk customers can be identified earlier and chased more rapidly further contributing to better credit and collection management.

The advantages of best practices for automatic cash application are numerous:

� Reduce DSO � Optimise credit and collection management � Achieve auditable and compliant processes (SOX) � Improve customer service � Standardise Order-to-Cash process � Align with Shared Services concept � Capitalise on and optimise ERP investments

Yet, challenges to optimising a company’s cash position are equally numerous:

When performing the cash application process, companies are often challenged to perform this in an efficient way. Key factors posing these challenges are the payers, the organisation’s internal systems and processes and market variables. The payers’ practices are critical elements when looking for optimisation potential: partial payments, combining invoices, providing no or little invoice details in the payment transfer and the usage of multiple local payment types are all factors that complicate today’s cash application process.

Further, the systems and processes that are in place are often obstacles in the order-to-cash cycle. Processes are often locally organised with varying degrees of automation; for example, the retrieval and posting of bank statements is done manually. Accounting and credit & collection teams work locally in a non-standard way. When ERP is implemented, organisations realise that the standard deplo-yment does not provide optimal value for cash application.

A third major component is the market dynamics and practices. Most organisations receive multiple types of information: bank statements, remittance advices, lock box (check) information and/or cash and credit card collections. Day-to-day receivables information, such as bank statements, is often received in many different formats. Besides, the formats of local banking practices typically limit the amount of information transferred in the statements.

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How to implement best practices in cash application:

1. Standardise processes

Generally, there are two main areas of improving the cash application process. Firstly, improving organisational processes can help shorten the straight-through reconciliation. This includes streamlined and standardised procedures: a company needs to define standard processes for dispute management, to clarify cooperation between accounting and credit management, to set a time table for regular management reports, and KPIs to drive down DSO on an on-going basis. 2. Straight-Through Processing is vital

Part of the straight-through processing strategy should be to carefully look at how information from banks and clients/trading partners is received and integrated into the ERP system. The manual steps in the retrieval and manual entry of bank statement items into the ERP systems can often be improved by companies. The same applies to paper-based remittance advices that are sent by clients. Quite often these remittance advices can be sent via email instead of normal mail which makes their processing faster and allows companies to automatically integrate this information in the reconciliation process.

3. Look for solutions to increase cash application efficiency

Specialised cash application technologies have proven to raise automatic matching rates to significantly higher levels than standard ERP functions. The flexible and more comprehensive matching logic increases the auto-matching efficiency while the key users are empowered to update matching rules to improve cash application on an on-going basis. Besides the auto-matching capabilities, companies need to carefully look at the manual processing of items that could not be cleared automa-tically. Many studies and customer feedback have indicated that here a lot of efficiency can be gained as the standard ERP tools do not unlock this optimisation potential. Specialised cash application solutions can drive down the post-processing time by another 50%.

4. Empowerment: visibility and control

The business environment in which companies operate is a dynamic one. New products are launched, banks are changed, new markets entered or payment behaviour of clients is changing. In order to anticipate these changes the management and accounting staff should have the possibility to get full visibility on what effects these changes may have on the cash application process. By obtaining this instant visibility coupled with drilldown facilities and trend analysis, companies can quickly respond to changes. This also requires tools that allow these changes to be made by the ‘key’ users instead of having to rely on IT to make these changes in the relevant systems.

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Technological solutions – what to look for:

Specialised cash application software can provide a lot of added value in the order-to-cash cycle when the right solution is acquired. Companies looking for a software solution should consider the following functions and benefits:

� Ability to handle all relevant financial information: bank statements, remittance advices, lockboxes, credit card, cash collections

� Immediate quantifiable benefits for automatic matching and for the manual post processing � Ability to handle complex B2B transactions in an international environment � Empowerment of the company’s key users in terms of visibility and control � Availability of performance metrics and guidance to maintain and optimise results (with no

or limited dependency on IT) � Support of auditable and compliant processes � Management reporting facilities (e.g., number of accounts not reconciled, age of items not

reconciled, and total amounts of unreconciled items) � Leverage the investment in ERP: seamless integration between general ledger and potential

subledgers

Moreover, ask potential vendors to help build the business case for your company. Cash application technology should bring immediate benefits to the organisations and vendors should be able to provi-de guidance and support in building the business case for your company based on your situation and peer group comparisons.

“Today the bank statement reconcilation process is highly automated whereby the tasks that still have to be performed by Perfetti van Melle have been reduced to a minimum. The entire implementation project was completed in only two months. Perfetti van Melle is impressed by the good results that FinanceSuite AutoBank Automatic Cash Application provided right from the start. We assumed that a new system would take some time to get used to. But the adjustment period for FinanceSuite AutoBank Automatic Cash Application has proven to be remarkably short“.

John Gommans, Manager Accounting & Reporting, Perfetti van Melle

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Best practice example of a fully automated account reconciliation process

Philips Lighting, the No. 1 in the global lighting market, sought to improve its account reconciliation process in order to gain a better overview of the balances of its accounts. Due to its business and customer structure, the share of paper-based advice notes of all incoming payments that are pro-cessed is about 50% of the total daily effort. Philips Lighting therefore decided to implement a Scan and OCR recognition software in order to electronically process this payment information, too. With all payment information being digitalised, Philips then introduced cash application software in order to automatically process the data, reconcile open items and clear accounts. Philips Lighting uses the FinanceSuite AutoBank Automatic Cash Application of the Hanse Orga AG and has since the day of implementation achieved matching rates of 80 %. “We are heading for an even better quota by using the broad capabilities of the product’s search and filter logic”, says Karl-Heinz Schönebeck, Accounting Manager, Germany. The employees were relieved of the many manual tasks and devoted their time to a more effective post-processing. An internal Competence Center was set up to support employees in the use of the new software. As the software is embedded in the SAP system, management now receives automatic reporting for all general ledger and sub ledger accounts. Hence, management can take informed decisions on the basis of real-time balances.

Conclusion

As described in this paper, there are many challenges complicating the A/R reconciliation process. However, companies can take measures to unlock the efficiencies in the cash application process that will drive significant and immediate benefits. These benefits are not only related to efficiency gains but also empower credit and collection teams with faster and more accurate information. This will allow organisations to further reduce DSO and risk: factors that are critically important in today’s business environment.

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Hanse Orga AG

Head OfficeOldesloer Straße 6322457 HamburgTel: +49 (0)40 51 48 08 - 0Fax: +49 (0)40 51 48 08 - 188www.hanseorga.deoffice@hanseorga.de

Hanse Orga International B.V.

Nieuwe Prinsenkade 94811 VC BredaThe NetherlandsTel: +31 (0)76 578 05 00Fax: +31 (0)76 578 05 50www.hanseorga.cominfo@hanseorga.com

Hanse Orga France SARL

16 Avenue des Châteaupieds92500 Rueil MalmaisonFranceTel: +33 (0)1 47 14 17 35Fax: +33 (0)1 47 08 97 89www.hanseorga.frinfo@hanseorga.fr

Hanse Orga International Corp.

220 East Huron StreetAnn Arbor, MI 48104USATel: +1 (0)734 302 3000Fax: +1 (0)734 302 3001www.hanseorga.cominfo@hanseorga.com

© Copyright 04/2011 Hanse Orga AG. All rights reserved.SAP® is a registered trademark of SAP AG.

The right partner

Hanse Orga, founded in 1984, is an independent software and con-sulting firm for Financial Supply Chain Management processing within SAP. Hanse Orga is SAP Software Solution Partner, the products are certified by SAP. Hanse Orga’s FinanceSuite offers proven added value for cash application and reconciliation, liquidity planning projects, wor-king capital management, corporate payment factory, cash manage-ment and treasury. As the entire FinanceSuite is programmed in ABAP, the software may be directly installed in SAP. The FinanceSuite has been developed by finance professionals for finance professionals with a strong focus on the end-user. The customer-focused approach before, during and after the implementation has resulted in more than 450 satisfied customers worldwide, such as BASF, BMW, Honeywell, IBM and Philips.