"As a multinational company with 2,000 clients and growing at about 80% a year, we've always regarded cash flow as our number-one concern," explains Frederick Roberts, CFO for Allen Systems Group, a Naples, Florida, systems software marketer. "We need every dollar possible in order to sustain our growth. By not being on top of our receivables, though, we were always running out of cash."
At the time, the company was operating under a traditional invoicing and collection system. The month a new sale or renewal fee hit the books, the company invoiced the customer and hoped that they paid in a timely manner. "A lot of times they didn't," admits CEO Arthur Allen. As noted above, some international customers didn't pay for six to nine months.
Allen and Roberts, working in conjunction with the credit and collections department and the company's bank, created an innovative system designed to speed up receivables and increase cash flow in three different ways.
1. Special attention to new sales. When the company makes a new sale, it invoices the customer immediately, and a representative from the collections department then calls the customer to make sure the invoice has been received, that it is accurate, and that payment has been authorized. If there are discrepancies or other problems, the representative will immediately arrange for corrections to be made and then fax a revised invoice.
"We're now able to collect payments for new sales within 30 to 35 days," reports Roberts.
The verbal contact with customers also alerts the company to any technical glitches that might exist in the software--problems that are hurting the client and holding up payment to Allen Systems Group.
"The moment we hear of any such problem, we contact our engineering department and arrange to have the problem solved," emphasizes Allen. This not only improves customer service but helps to improve cash flow.
2. Early billing for annual renewal fees. These fees provide a tremendous amount of cash flow to the company, particularly if they're paid on time. After researching clients' fee payment history, Allen devised a new billing system.
Ninety to 120 days before a client's renewal fee is due, the company now sends a letter to the client explaining that it will soon be receiving an invoice from Allen Systems Group for the fee. A few days later, a representative called the client to ensure the letter was received. During the same call, the representative updated the accounts payable information:
- Who is the proper person to receive the invoice?
- Who in the client's organization is in a position to authorize payment?
- What is the customer's payment cycle? (7 days? 14 days? 21 days? 30 days?)
The company then sends out the invoice, so it reaches the client 60 to 90 days before the due date, and the representative calls again a few days later to make sure the client has received the invoice and that it is in the proper order (similar to the process for new sales, discussed above). Again, if there are any problems, the representative arranges for corrections and faxes an updated invoice.
The representative calls the client again if payment has not been received according to the client's previously stated payment cycle. For example, if the client reported paying every seven days, the representative calls seven days after the invoice has been sent to make sure payment has been sent.
The prepayment program has been extremely successful. Allen reports that last year, the company was able to collect almost $1 million in prepaid renewal fees. "This has helped our cash-flow situation tremendously," he emphasizes.
By knowing how much is due when Allen and Roberts are able to conduct accurate cash-flow projections. "We know by day, by week, and by month how much cash will be coming in," says Roberts. "This allows us to plan ahead for how we'll move this cash around the world as part of our growth plan."
Finally, clients appreciate the process. The advance reminder letter helps clients understand the ensuing invoice. "Without this advance letter, clients may not understand the invoice and have to put it in someone's in-basket for follow-up research," explains Allen.
3. Local collection of international billings. As mentioned above, while domestic cash flow was a problem, international cash flow posed an even more significant challenge. Not only were payments delayed more (in some cases, six to nine months, versus three to four months for domestic), but the company faced time and expense issues with the various currencies some clients used for payment.
Under the previous system, international clients paid in either United States dollars or foreign currency. In either case, they sent payment directly to Allen Systems Group headquarters in Florida. If payment was in dollars, the company would deposit it. If payment was in foreign currency, the company would pay to have it converted to dollars, and then wait for it to clear.
Under the new system, Allen now works with a large international bank, which is able to accommodate the company's growth from a treasury and cash management perspective. "They manage our cash around the world for us," reports Roberts. In countries where this bank does not have a presence, Allen Systems Group works with the top banks that are the most accommodating to United States companies.
Here is how the system works:
- Allen Systems Group invoices its international clients directly from its United States headquarters.
- Upon receipt of the invoices, international clients make payments directly to the authorized bank in their country, either electronically or by mail. (The invoice has the bank's lockbox number printed on it for customer reference.)
- Each day, the bank posts the receipts and faxes the deposit information directly to Allen Systems Group. "We then have immediate access to the cash," reports Allen.
The system accommodates different currencies, also. Clients can pay in one of two ways:
- If they wish to pay in United States dollars, they can directly make payments to their domestic bank (as described above).
- If they prefer to pay in a foreign currency, they pay the domestic bank in that currency. The bank then forwards the payment (in the same currency) to the London bank at which Allen Systems Group has special multiple currency accounts.
This arrangement provides two significant benefits to the company . . .
- Preventing international clients from being able to play the "international currency game" (taking advantage of changing international currency values).
- Eliminating currency conversion problems. Since Allen Systems Group has expenses in these other countries, as well as income, it no longer needs to convert the international currency to United States dollars stateside, and then send dollars back around the world to fund its operations. "Under this new system, we can leave the international currencies in our international accounts in London and pay our international expenses directly from these accounts, in the appropriate currency," explains Roberts. "This eliminates the time and cost of converting the currency to dollars, then sending it back overseas."
As a result of this new arrangement, international receivables have plummeted from over 120 days to between 40 and 45 days, and currency conversion costs have virtually disappeared.
|
|
Editor
|
.png)
|
|
|
|||||||||||