(edit title) Business Case - Any Financial Experts Out There? Financial Value on 'Time to Invoice' Reduction Options

[John.Smith]

Howdy,
As usual I am working on a Red Day , but could use some of your expertise.

I am working on a large business case for my employer for a global project. The project will go into the multi-million Euro level (unsure right now but looking at a €5-7 million investment).

One area I am examining is the potential we have to reduce our time to invoice KPI (i.e. time from good delivery to invoice issuance). I need to be able to put a € value/day on this in terms of cost to the company. The thing is, this time duration has no direct costs, i.e. if we wait 4 weeks before issuing the invoice then there is no direct labour costs associated with this, or storage costs or admin costs etc...

Another theme would be that we potentially save in terms of inflation i.e. getting the money in faster. But the inflationary increases in a 3-4 weeks period are so minimal as to be almost not measurable.

So, what if any measurable financial benefits are there?

Give me ideas folks!

[Yorkshireman]

A few things to consider and factor in (just quickly as I am on day off!)

Issuing invoices earlier is part of improving the companies cash-flow, you will have to check with finance on these things and calculate amounts accordingly.

If you are issuing invoices with say 30 days payment, then taking 4 weeks to issue actually is giving your customers almost 60 days credit! Issuing the invoices earlier should bring in the cash quicker.

There are many small possible gains depending upon how your company's finances are handled.
eg.
- Payments in earlier by 4 weeks = extra interest that money could gain in overnight investment accounts, rather than the customer gaining interest at your expense (Your not a bank are you? ).

- If the company finances itself with short term credit facilities, then bringing in the revenue earlier will allow them to save paying interest charged by those facilities.

- Improved cash flow could also lead to the company not stretching due dates on it's suppliers invoices, ie. can pay easier on time. There are cost savings there.

- check history on bad debt, and how much it has cost and how long to identify and chase. Issuing invoices earlier will reduce that time and cost.

[John.Smith]

Thanks! Excellent points and well articulated (as in easy for a financial dummy like me to understand).

Couple of points:
1. I work for a large multinational with operations in 36 countries and revenues of €10 Billion. The project is global but focuses specifically on the after-sales/service part of our business and thus I need to create 'global' averages in €uro ... no small task
2. Good point on the earned/lost interest aspects. The company is cash rich and does not use credit facilities for any aspect of the business. The point here for me to look at in the lost 'earned' interest in the lodged cash from customers.
3. Liquidity is not an issue for us (thankfully) so payment to suppliers is performed quickly.
4. Our central Controlling organisation in Germany does not seem to be able to help me with any € numbers on this topic. . However the interest topic may give them something to work with.

The overall benefit is to reduce our lead time from order creation to invoicing... everything inbetween the Order Creation and Service Delivery process I have under control... just this damn invoicing topic left..

Thanks for the input!

[geekuma]

I've been working in the billing department (supporting retail and wholesale, from consumer to large enterprises). Some thoughts based on that (and definitely not saying that they are absolute truths applicable everywhere - every business needs its own specific refinements).

I would say that you definitely want to have your invoice drop-date (when the customers receives the invoice either/both in electronic and paper forms) as soon as possible as you billing procedures (bill cycle, bill run, etc. whatever you call it) have been completed. In the area of business where I was working this drop-date was usually targeted to be quite fast, just 4-5 working days after the approved bill cycle (this included the time spent at the printhouse to actually create, envelope and mail the invoices). And obviously, if the local laws that allow, one can shave even that time legally shorter by appointing the electric invoice as a primary invoice (due date counted based on that instead of paper).

In my example it is easy to follow few key points: when the bill cycle results were accepted by the finance department, when the printhouse finished their tasks, when the invoices reached the customers and when the major bulk of payments are actually done. But instead of counting just days one can also put a value to those days.

Counting methods can vary greatly in different business fields, but I could suggest something as a starting point: the interest on the account where the customers pay their invoices to. This interest can vary humongously, but I'll pull out a figure from the top of my head just to give an idea what it could be: let's say you have 2 M€ in your invoices - one day delay could cost you 500 € in lost interest only. I guess now it suddenly makes sense why company should have multiple bank accounts from different banks, so customers have it easier to pay - no money lost over waiting the inter-bank transfers (which in worst scenarios over the weekend can extend to 4 days).

I know the thoughts I wrote here are quite generic in their nature. I hope it makes at least a bit more sense than me saying "water is wet" :-D

PS: Please remember that whenever you start any kind of measurement, you are measuring that thing only. With this I want to point out the dangers of wrong interpretations. Eg. even if the drop-date would be one day late it might have a zero impact if the due date is still unchanged.

[John.Smith]

Thanks Geekuma,
Good points! I think this interest topic is what I will chase up. The specific organisation within my company that I am dealing with has a turnover of in excess of €1Billion p.a. globally. That is a lot of interest.
All of our invoicing is manually done, i.e. line item by item in SAP, this is due to the complex nature of the work in that not two service jobs are the same. Further, each invoice can contain up to 100 lines! Each line is selected from our materials master (for that country) with appropriate pricing. This element of the invoicing is something that I am also improving with the project and we seek to reduce the 'invoice creation' process by 50% timewise. This is easily measurable and quantifiable in terms of €€€'s.
I also feel that we can reduce our time to invoice by up to 75% and create a 3-5 day billing routine. The billing terms are variable depending on local laws and customs so this is something I also have to factor in.

My next question now is; looking at this €1billion in any given 12 month period, and assuming that I can reduce average TTI from 4 weeks to 1 week (5 working days), and assuming that say interest averages e.g. 1% p.a. (pulled that one out of behind), how does one then about actually measuring the increase in interest that is applicable?

It does not necessarily mean that each €1 of the €1b stays 3 weeks longer in the account? It just means that it hits the account €3 weeks earlier.... We could of course just make the assumption that the account is treated as a trading account for incoming and outgoing of course. If this is the case is it too simple to say that it could potentially be the interest on €1billion @1% for 3 weeks?? That's a lot of moooolah!!

I suppose I could perform a Standard Deviation calculation (weekly) and spread the €1b evenly across 52 weeks in the year and work out how much interest would be earned per week... Wish I had listened better in my management accounting classes all those years ago!!

[Yorkshireman]

When creating a business case, and ROI benchmark for this project I would tend to simply look at an annual total and periodise quickly to Quarterly, since if a publically listed company it would fit into the companies quartly reporting to shareholders

It would be reasonable to take the annual total invoicing (divide by 4), quarterly if there is a definate seasonal pattern to the service part of the business.

If for example you will shave off 2 weeks from the 4, then you can simply take the total amount annual/quarterly and calculate the total interest on the total amount for 14 days. Reasoning behind this is that you are shaving on average 2 weeks of every invoice throughout the measured period. It could be a good idea to show a little table showing the net effect of reduction by 1, 2, 3 weeks.

If you go into too deep-a-details then it is opening up a can of worms and people tend to focus on where they think the details may be too incorrect rather than the total objective which is to get the invoicing lead time reduced, with resulting financial benefits through improved cash flow.

Service and spare-parts is always a little tricky, since it does have so much manual effort in data entry that is used for invoice generation, along with other issues of spare parts forecasting and replenishment!

If not already, reduce the data entry requirements by making it more efficient when picking spare parts to use, bar coding and automatic entry into SAP would be a good idea. even if you just print (or have suppliers include) RFID labels on the parts, or stock locations.

One thought also would be to look at the average "thing" being serviced, group them, and customer also, calculate the average invoicing and spare parts used ... and consider whether it is easier all-round for your company, and customers, to introduce a service contract that is charged say quarterly in advance based on average service costs for those "things". When service is required, it is already paid for, and parts used are only required for internal auditing/planning rather than invoicing. That way You can get invoicing done to before the next quarter, cash is in the bank longer generating interest. Keep a manual process and maybe premium charge for non-contract service customers.

In your calculation, and review, You should calculate the total administration cost of creating an invoice, and how You intend to reduce that, ie. cost savings. That would include, time to enter the data, processing, printing, sending etc... It can be quite surprising sometimes to find just how much it can cost when looking at service businesses, especially with so many spare parts. How much time is spent correcting invoices where incorrect spare-parts have been coded etc...

[John.Smith]

Thanks again for the good info. The process elements that involve manual entry of data are already covered in terms of lead time reductions. Just to give you an idea of the scope:
We have a product hierarchy of 76,000 individual products that we can service ranging from tiny pumps to huge industrial machinery (eg a whole production facility such as Ford motors). The spare parts catalogs go into the millions of parts and part numbers. Of the above numbers we have around 20% of the products that we regularly service (as in 20% of products create 80% of business) and with spares it is about the same. We are introducing 'quick-pick' groupings and also automatic selection of parts depending on product hierarchy etc... We are looking to make significant savings on the whole admin process behind each order. This is easy to measure.

The Interest topic is more complex and it is potentially shaping up to be significant in terms of €€€'s.
The quarterly approach won't work, we are a private company and thud no shareholders reports etc.. I think monthly may be appropriate. Will need to think about it more.

Thanks for the input!!

[Yorkshireman]

The Interest topic is more complex and it is potentially shaping up to be significant in terms of €€€'s. The quarterly approach won't work, we are a private company an ... (show full quote)

The Interest topic is more complex and it is potentially shaping up to be significant in terms of €€€'s.
The quarterly approach won't work, we are a private company and thud no shareholders reports etc.. I think monthly may be appropriate. Will need to think about it more. ... (hide full quote)

It depends how pedantic and picky the executive are! If they talk monthly, quarterly or annual. Everything is a little finger in the wind anyway. I bet their forecasting is not super accurate at a period level!.

I would suggest starting with an annual figure, then apply a quick periodisation to it, either to quarterly or monthly, makes no difference. The total is the same.

Problem with monthly is that it depends on your financial periods. Are they calendar months, or do You run like many large corporations in quarters where periods are split 4-4-5 weeks, or 5-4-4 weeks. In that case, you end up with at least 4 x 5 week periods (months).

If you need it to be even more complex, you could always look to factor in the tax benefits of more cash being available for inter-company loans with reduced corporation taxes also. I know it is a touchy subject just now in Sweden, and they have fixated only on Risk Capitalists, when in reality ALL large corporations manage their tax liabilities in creative and legal ways.

As said, there are many small (but big in value) pieces when improving cash flow. Always best to start with an immediate estimated annual figure, and work downwards into finer details if needed

[geekuma]

All of our invoicing is manually done, i.e. line item by item in SAP, this is due to the complex nature of the work in that not two service jobs are the same. Further, each in ... (show full quote)

All of our invoicing is manually done, i.e. line item by item in SAP, this is due to the complex nature of the work in that not two service jobs are the same. Further, each invoice can contain up to 100 lines! ... (hide full quote)

Getting briefly back to this old topic.

The complex nature itself is already a driving force behind automatisation. The more complex system, the more possibilities of human error and (sadly) of more "creative" actions taken by some individuals. To enable the transparency and improve accuracy you need to have it automated, at least to some degree.

I can tell you, that 100 lines of a monthly invoice is nothing compared to some interesting cases I've seen. Try 100 Excel sheets with different categories and linking to different agreements. I'm not saying this in competitive way (like I was better than you) but I'm saying this in supportive way (you certainly have hope) :-)

Last piece of advice: If you are working in a such a big company and big money, request some help from your business analysts or get a hired-gun (consultant) to help you out. They should not try to prove/support your case, but study it without prior assumptions. After that you should have heavier ammunition to discuss with your superiors.

All the best,
/m