REL Consulting Offers Guidance on How Companies Can Improve Receivables Procedures to Close The Gap
MIAMI & LONDON, January 4, 2012 – The U.S. Postal Service’s recent decision to eliminate next-day delivery of first-class mail could cost typical large U.S. companies up to $100 million each year by making it significantly harder to collect from customers quickly, according to new research from REL Consulting, a division of The Hackett Group, Inc. (NASDAQ: HCKT).
REL, a world-leading consulting firm specializing in working capital management, also offered guidance that companies can use to address the impact of the post office’s change.
Last month the U.S. Postal Service announced that it would be eliminating next-day delivery of first-class mail, as part of a move to close about half of its nearly 500 mail processing centers nationwide and eliminate 28,000 jobs. Currently, about 40 percent of all first-class mail is delivered the next day.
Typical U.S. companies now take more than five weeks to collect from customers, according to REL’s latest working capital research. REL also estimates that more than 60 percent of all invoices are still delivered by mail, so the elimination of next-day first-class mail delivery is likely to add at least two to four days to the collections cycle for many companies — an extra day or two in the mail before the customer gets an invoice, and another day or two when customers mail their checks back. This will potentially increase Days Sales Outstanding (DSO) for many companies by up to $100 million annually.
According to REL’s analysis of collections performance by 1000 of the largest public companies in the U.S., top performers now collect from customers 44 percent faster than typical companies. A typical company (with revenue of about $10 billion) could net $260 million in working capital improvements by optimizing their receivables performance to match top performers in their industry.
There are several actions companies can take now to avoid a hit to accounts receivables when the post office makes its change. REL Global Customer to Cash Practice Leader Veronica Heald offers the following guidance:
Bill More Quickly – “Many companies still bill once a week, or even once a month. This may be simpler, but it’s counterproductive. Bills need to go out as quickly as possible,” said Ms. Heald. “One good first step is to consider delivering bills via e-mail. But it’s critical that companies confirm delivery, either by phone or using electronic receipts. The longer it takes for an invoice to reach a customer the longer it will be before the invoice enters the customer payment process.”
Make Proactive Collections a Priority – “There’s a lot most companies can do to take a more strategic and proactive approach to collections,” said Ms. Heald. “Companies should segment their customer base to better understand where collections problems are, and where the best opportunities for improvement lie. If companies want to ensure that payments will be timely regardless of mail impacts they need to be first in line. Collections contacts prior to the due date of a receivable are key.”
Encourage Payments via Electronic Means – “Organizations should, now more than ever, conduct focused efforts to transition more of their customer payments to electronic methods such as using an automated clearing house (ACH), wire, or debit/credit, starting with those customers accounting for the majority of revenue. ACH payments are a fraction of the cost of checks and ensure faster delivery,” said Ms. Heald. “For some companies, it could be as simple as making sure that electronic payment remittance information is included on the face of the invoice.”
Implement Relevant Performance Indicators – “Companies need to get ahead of the game, and measure float now in areas like mail, bank clearance, and payment processing,” said Ms. Heald. “This will enable them to set reasonable improvement targets.”
Understand and Enforce Terms & Conditions of Contracts – “It’s surprising how many companies simply don’t enforce the existing provisions in their contracts,” said Ms. Heald. “For example, they may allow their customers to calculate payment due dates from when the invoice is received while the contract calls for it to be calculated based on the day it is issued.”
Reconsider Grace Periods and Discounts – “Grace periods and early discounts can be more carefully tracked, to avoid giving customers discounts they haven’t earned,” explained Ms. Heald. “Unless customers change their payment processing strategies to account for the increase in mail float, which is unlikely to happen, payments will be received later than ever, including discount payments.”
Adjust the Lock Box Strategy – Finally, Ms. Heald suggested companies reevaluate their lock box strategy, and consider changing the mailing address customers use to send in payment so that lock box distribution matches customer distribution, potentially cutting mail delivery time.