Be Capital Efficient: How RecVue can help you accelerate working capital and reduce cost of capital
“The difference between ordinary and extraordinary is that little bit extra”
- Pro Football Hall of Famer Jimmy Johnson
Are you able to satisfy all of your billing automation requirements? Maybe 80% is good enough? How about 90%? You need that little bit extra to achieve 100%.
Your business is changing. Evolving. Inventory and product sales changed to assets and rental or leasing. Subscriptions metamorphosed into usage fees. Price lists transformed to rules-based pricing, with multiple variables expressing seemingly endless price options. Some of this is easily automated but it’s just impossible to automate 100%. You’ve explored customizing your ERP, building an in-house solution, and off-the-shelf SaaS billing platforms, but it seems achieving a 100% match to your business needs is elusive.
Before we go any further, let’s agree on the definition of a few terms:
- Days Sales Outstanding (DSO) - is a measure of the number of days it takes for a company to receive payment after a sale is made.
- Days Unbilled Outstanding (DUO) - is a component of DSO ( together with working capital is the difference between a company's current assets and current liabilities.
It is important to keep track of these metrics as they can impact a company's cash flow and profitability. Generally, a lower DSO and higher working capital indicate that a company is more efficient in its billing and collections process. A higher DSO and lower working capital may indicate that a company is extending too much credit or that its customers are taking too long to pay their invoices.
So let’s go back to 80 to 90%. The company in the example above is a large technology company offering various data solutions, software, and services.
Their Annual Revenues are roughly $1Bn.
- 30% of these revenues are subscription based. Complex, rules-based billing.
- 60% of their revenue is event-based, but data defining the events and thus the expression of the variable contract terms reside in multiple applications from several sources. The data required to perform the billing and a revenue share calculation is not synchronized.
- The remaining 10% of revenue relates to various facilities provided as an ongoing service. All billing for these services is manual.
RecVue automates and standardizes time to bill, no matter what business unit, order type, or revenue stream. Rules-based billing uses mediated data sources to determine how a contract is expressed, generating billing lines in real time as billing conditions are met.
The working capital improvement of $45 million, of which $37 million will come from reducing days outstanding of receivables (DUO) of only 10% of annual revenue from 15 to 2 days for that revenue tier, is a significant development. This is a positive development because it will mean that the company will have more cash on hand to reinvest in its business and drive growth. In addition, this working capital improvement will have a positive impact on the company's bottom line. Analysts believe this working capital improvement could add $0.30 to $0.40 per share to earnings. This is a significant development for the company and its shareholders.