Cash conversion performance is a barometer for overall business quality.

This is something I remind clients who either tell me that they have enough cash or that interest rates are low, debt is cheap, and cash conversion is not a necessary focus. I respond that our clients in the upper quartile of working capital performance metrics relative to their peers have steadily improved their cash conversion rates, based on EY’s latest working capital management report. They are often flush with cash, but they continue to focus on improvements in areas such as quote-to-cash to reduce bottom-line costs and increase topline growth. The hallmarks of these exemplary companies are effective and efficient cash conversion processes as part of a genuinely ingrained cash culture.

There are tremendous advantages to having and building cash on the balance sheet.

• The company is better able to take advantage of changes in the market.
• The company can be agile in making acquisitions.
• The company can pay down debt and be prepared to weather a future storm. There is nothing like having a strong balance sheet.

Yet despite the early lessons from the pandemic, many companies have taken their eye off cash conversion. Instead, the smart ones continue to focus on cash issues, starting with trouble collecting from customers, which is likely a self-inflicted problem that is tying up resources and needs to get resolved.

Hidden Costs in Cash Conversion

Consider the quote-to-cash process. Most companies don’t understand that roughly two-thirds of the costs incurred to collect on invoices are hidden. That is due to all the people touching steps in the process, which expands the opportunity for error. Billers, sales support, collectors, and cash applicators are the tip of the iceberg. Well-paid salespeople may need to resolve inaccurate orders or chase down missing purchase order information instead of what they are paid to do — sell.

Cash can also get tied up in tax and legal support, third-party collection fees, software license fees, bank fees, and management support. All are prime examples of hidden costs tied up in the quote-to-cash process. In addition, errors increase costs significantly and create a poor customer experience, resulting in a drain on people, resources, and revenue.

Effects of Technology and Culture

Automation is one part of improving cash, including opportunities to introduce robotic process automation (RPA), predictive analytics, and software applications that reduce errors, increase productivity, and help humans and processes become more efficient. Improved processes and use of labor-saving digital capabilities not only improve cash flow and decrease the expense associated with the quote-to-cash cycle, but they can also have a significant impact on sales productivity.

It starts with understanding the drivers that impact the balance sheet positively or negatively. Then, as companies mature, they focus not only on results but how they attained those results.

However, while tools and software can eliminate human interaction, they never wholly replace people from tasks such as contracting and developing sales orders. And automation tools alone will not lead to cash improvement when processes are broken. Many CFOs I talk with are trying to instill a cash culture in their organizations. It starts with understanding the drivers that impact the balance sheet positively or negatively. Then, as companies mature, they focus not only on results but how they attained those results. Who had to be involved? How much does it cost to convert a dollar of cash? And, how could resources be better deployed?

Lost revenue may result from a culture where salespeople are not spending enough time selling, and the poor customer experience turns revenue away. It is not uncommon to find that salespeople spend less than 50% of their time on actual sales or proposal development. We ask salespeople to do far too many non-sales-related tasks and then compound the problem by not providing them the tools and support to minimize their involvement.

Where to Begin

A great way to improve cash is to process-map an invoice from the initial sales quote, through contracting and billing, collections, and finally to applied cash. You may be surprised at how many manual steps are involved and how frequently errors can occur. At each point, manual steps can become a potential point of failure that leads to slower revenue collection and increased rework. In addition, I’ve found that the actual cost to invoice, including all labor and third-party fees, is often two to three times higher than most assume.

One company we worked with had a problem adhering to purchase order requirements. When it created a bill for a customer, it did not reference the purchase order, and the customers would refuse to pay without that reference. Some of the issues were training and some were adherence to policy. Automation helped, but sound processes and commitment to policy turned things around.

No matter how low interest rates are or how healthy a balance sheet is, savvy CFOs understand that needlessly tying up cash due to highly manual and poorly developed processes is never the correct answer. They also appreciate that ineffective cash conversion is a symptom of bigger issues that may be preventing salespeople from selling and that may be running up administrative costs. CFOs who are driving a cash culture are focused on continuous improvement and seek effective generation of cash and efficient generation. They understand that efficient cash conversion also produces topline revenue growth and bottom-line cost savings.