Working Capital Magic - From Customers to Cash Flow

SOX Compliance in Credit & Collections

A lot of folks are focused on SOX (Sarbanes-Oxley) compliance.  And some of these folks are actually the companies trying to go through the SOX compliance process.  The fact of the matter is that there are a myriad of companies out there looking to sell products or services around meeting SOX requirements.

Now, I think that although automation software and audit & compliance services are important, companies really need to look at different processes within the enterprise to accurately judge what they need.  Many times, improvements in their internal business processes can go a long way towards achieving compliance.  Today's post is going to focus on setting up internal controls around the accounts receivable, credit & collections functions.

Although all of this rolls up into a COSO framework (stay tuned for a future posting), some of the things that are critical to address are identifying controls and ensuring testing of these controls for every aspect of the Customer-to-Cash process:

1. Order Processing: You need segregation of duties in the order entry and management process.  Many times, this can be set up in the ERP system with authorization levels for different transactions

2. Accounts Receivable: many things need to be controlled here, but specifically credit memos and write-offs need to be only authorized by appropriate management approval.  Additionally there have to be segregation of duties in different functions of A/R

3. Credit Management: you probably shouldn't have the same folks assigning credit limits as those applying cash and performing post-payment activities.  More and more companies are looking to segregate, monitor and control these activities

4. Cash receipts: cash application from the lockbox has to be as automated as possible (it helps your hit-rate too).  Additionally, a set of reconciliation acitivities have to take place between payment transactions and the banking records.

Finally, you have to have a reat internal control plan, documentation, test plans and a remediation plan when infractions occur.

Its pretty clear that process changes have to go hand in hand with technology and personnel training for companies to be successful in their SOX compliance efforts.

Cash Forecasting and Price Volatility

In many industries, including those dealing with commodity goods, pricing changes are rampant and can make generating an accurate cash forecast especially difficult. The only way to deal with these fluctuationsis to have a solid cash forecasting methodology to address the dynamic nature of pricing changes, customer payment habits and changing business conditions.

The best approach for cash forecasting will focus on defining a reasonable scope and an appropriate level of precision. This in turn will lead to being able to easily compare actuals to forecast values and determine variances.  The challenge is to easily access distributed financial data in a timely manner, store historical cash flow data for trend analysis and allow simulation of multiple cash forecast revisions based on multiple sources of input. These sources of input could be individual collector information, promises-to-pay from customers as well as historical payment data.

When dealing with pricing changes, you need to identify trends and cycles from the past and apply them to the cash forecasts. If pricing changes are seasonal, for example, the reflected payment history can be taken into consideration while generating the forecast. Similarly, each forecast revision can be updated to reflect other criteria such as known projected pricing changes, thresholds set by collectors, etc. In this manner, simulations of different forecasts, along with realistic acceptable variance levels, can bring a higher level of predictability to cash flow processes.

Short term cash forecasts based on receipts and disbursements are even more powerful when you go beyond billings and vendor invoices - the real power lies when you take into account anticipated events on the supply and demand side.  More on this later...