Optimizing Working Capital: The Importance of Efficient Billing and Collections Processes
As business models evolve, so too must the billing systems that underpin them. The key to a successful billing system is automation; creating billing lines as soon as the service is rendered, or revenue recognized. This is simpler when billing to milestones, events, or structured timescales (such as subscriptions), but more and more companies are evolving to usage-type or consumption revenue streams and resultant billing. But this shift is not discrete. Business model evolution often means revenue stream expansion and this results in ever-increasing complexity. A billing system must be able to handle this complexity, automating the creation of billing lines regardless of the underlying revenue stream. Only then can businesses be sure they are maximizing their revenue potential.
Why Working Capital is So Important
Effective management of working capital is vital for businesses, as it is a key indicator of their financial health and ability to pay short-term obligations, which can impact profitability. Working capital is calculated as the difference between current assets and current liabilities, and it is important to keep track of these metrics, especially the Days Sales Outstanding (DSO) and working capital, to ensure a company stays on track with its financial goals. High DSO and low working capital may indicate credit extensions or delayed payments by customers, and companies can optimize their working capital through DUO (Days Unbilled Outstanding) and automated invoicing, reducing holding costs and improving profitability. According to a recent PWC study, 65% of executives believe improving working capital efficiency should be the main priority for change management and restructuring activities.
DSO, which is the number of days it takes for a company to receive payment after a sale is made, reached a five-year high of 54.1 days during the pandemic. This trend was due to increased late payments from customers and difficulties in collecting payments due to the COVID-19 pandemic. While it has lowered in recent years, this delay in payments can affect a company's ability to meet its obligations and hamper growth. PWC urges businesses to review their Accounts Receivable processes and implement best practices to improve collections and reduce DSO.
Managing accounts receivable and payable is crucial for maintaining a healthy cash flow, as cash is the lifeblood of any business. To improve DSO and working capital, businesses need to ensure payments are billed, received, and allocated promptly, although this can be challenging. Keeping a clear understanding of billing cycles and payment terms and staying on top of incoming and outgoing payments can help businesses maintain healthy cash flow.
DSO lengthening is a worrying trend for businesses, as it suggests they are struggling to collect payments in a timely manner, causing problems with bill payments and affecting credit scores. Unbilled revenue can be a major issue for businesses, especially those in industries where billing is complicated, and it can be caused by various factors such as inadequate training or insufficient resources, and late customer payments. While it may be challenging to control all these factors, businesses can reduce the impact of unbilled receivables by improving their billing processes and resource allocation.
Organizations must understand that billing at the correct time is essential to their success. With defined processes, controls, and systems, billing correctly is completely within their control. This means that businesses must set up their invoicing processes in a way that meets their internal needs while adhering to any relevant laws and regulations. The organization's invoice processing system should be designed to account for all the necessary steps, from creating the invoice to issuing payments. By taking the time to set up a robust invoicing system, businesses can save themselves a great deal of time and money in the long run.
The role of automation in billing is crucial for companies shifting to usage-type or consumption revenue streams. In the past, businesses would bill for services rendered or revenue recognized. This was simpler when billing to milestones, events, or structured timescales (such as subscriptions). However, as companies evolve their business models, they often expand their revenue streams. This results in ever-increasing complexity. Automation can help to manage this complexity by creating all billing lines as soon as the service is rendered or revenue recognized. This ensures that businesses are able to keep up with their ever-changing billing needs. As a result, automation is essential for companies making the shift to usage-type or consumption revenue streams.
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