How's your corporate governance

Corporate governance refers to the set of systems, principles and processes by which a company is governed. They provide the guidelines as to how the company can be directed or controlled such that it can fulfil its goals and objectives in a manner that adds to the value of the company and is also beneficial for all stakeholders in the long term. Stakeholders in this case would include everyone ranging from the board of directors, management, shareholders to customers, employees and society. The management of the company hence assumes the role of a trustee for all the others. Fundamentally, there is a level of confidence that is associated with a company that is known to have good corporate governance. The presence of an active group of independent directors on the board contributes a great deal towards ensuring confidence in the market.

Corporate governance is known to be one of the criteria that foreign institutional investors are increasingly depending on when deciding on which companies to invest in. It is also known to have a positive influence on the share price of the company. Having a clean image on the corporate governance front could also make it easier for companies to source capital at more reasonable costs. Unfortunately, corporate governance often becomes the centre of discussion only after the exposure of a large scam

How is corporate governance evolving: The Rules of the Game

Corporate governance is becoming more complicated, sophisticated and is providing both greater opportunities and expectations for businesses. To understand how corporate governance is evolving and changing, there are a few important ideas that are critical for businesses.

  • Companies must not only implement general corporate governance practice but must focus on best practices in good corporate governance
  • A key element of good corporate governance is good risk management
  • Another key element of good corporate governance is managing a company’s reputation and how it is perceived in the global and local community

What is the relationship between corporate governance and risk management?

Risk management is increasingly becoming a key element of good corporate governance. Some corporations have developed sophisticated and institutionalized ways to ensure that risk is identified and analysed. Other companies have little or no risk management capacity. While risk management techniques require investment of time and other resources to properly address, they are critical to all businesses, even if the firm’s risk profile is relatively benign and simple.

Risks manifest in many forms, and can appear without warning and with serious and significant consequences. The recent global financial crisis is the most recent example of how risks all of types can appear with little warning and impact companies across all business sectors. While it is impossible to eliminate risks, companies need to develop processes and policies to improve how risks are identified and analysed.

Order to Cash (OTC) and its related risk

Is the heart of any manufacturer’s supply chain, and how they ultimately make money. Whether the manufacturer makes the end product itself, or outsources all or most of its production in order to focus on design and marketing, the company still has to take orders and ensure that goods get delivered to customers according to their expectations. This means the order must be on time, in full, without error – and, of course, profitable to the company

Key components of the OTC cycle

  • Customer master set up – creating the master data base for all customers that will permit any commercial transactions. Typically, the masters contain data such as, addresses, tax and statutory registrations, and credit limits, among others.
  • Order entry – capturing the order received from a customer for a specific product or service at a negotiated price, and terms.
  • Credit check – validating the creditworthiness of the customer based on past transactions and open orders before permitting further order execution.
  • Billing – generating invoices for orders captured based on actual shipment of goods or rendering services.
  • Collections – collecting payments against orders executed and billed to customers. Collections can happen through physical means (cheque or cash) or wire transfers via banking channels.
  • Refunds – refunding to customer any money wrongly received, either because of product-related issues (defects, returns, and claims among others), or due to cancellation of orders or excess payments received.
  • Deductions’ management – negotiating with the customers for short payments received and recovering or agreeing on the deficit.
  • Cash applications – applying collections received against specific invoices, to knock off the outstanding in the ledger. This is the final accounting of collections to reduce debts in the books.

Inherent risk within the OTC cycle

  • Credit limit for a given customer is exceeded and results in credit risk
  • Excessive discounts offered to customers
  • Pricing errors or unauthorized price changes
  • Delays in shipments and invoicing
  • Unreconciled receipt and invoice amounts
  • Lost revenue
  • Increased cost of collections
  • Disputed billings
  • Delays in receiving payments

Benefits From Order-to-Cash Process Improvement

There are numerous benefits from improving the order-to-cash process. These benefits are especially important to low margin or investment intensive companies. An efficient order-to-cash process allows companies to:

  • Invest capital in higher value added activities since excess outstanding receivables have a minimal return on capital invested.
  • Reduce the level of external financing required. This improves profitability by lowering debt interest payments and by reducing the level of external financing required as a company’s debt-equity ratio improves.
  • Decrease the administrative effort and cost required to manage the collection process.
  • Increase collections by decreasing DSO. Generally, older receivables are more difficult to collect, and the longer receivables remain unpaid, the higher the risk of a customer being unable to pay.

To reap these benefits, finance executives need to master the intricacy of the order-to-cash cycle, which tends to cross several corporate functions and which varies, sometimes significantly, from one business to another. Yet, they must remain highly sensitive to customer satisfaction metrics as many A/R processes directly touch customers and the revenue they deliver.

Top Ten Tips for an Optimal Order-to-Cash Process

  • Know the customer
  • It’s a risky business (so know how risky)
  • Keep the sales team risk-aware…
  • Make sure risk policies are adhered-to from the start
  • Smooth out the collection process from the front
  • Diplomacy is at a premium (dealing with difficult customers)
  • Get strict on dispute management
  • Get the dunning down pat
  • Remind the organization: it’s about you too
  • Get the buy-in (from everybody)

Working capital is the lifeblood of any company—so why is over $1 trillion “stuck” in overdue Accounts Receivable around the world right now? If your Order to Cash (OTC) function uses multiple data systems and manual processes, doesn’t provide tight regulatory and internal compliance, and cannot instantly track the status of any invoice, very likely some of that trillion dollars is yours.

Need help...

From having worked in warehouses to running large receivable departments for companies like AVI, Procter & Gamble and Danone, I have come to recognize the complexity of the order to cash (OTC) cycle.

Managing DSO’s, bad debts and customer relationships have been my life for the past 15 odd years. If there is one thing my long career has taught me that is the value of well mapped, documented and deployed process in mitigating the risk related to the collection process.

I believe that stewardship should be weighted just as heavily as operation outputs on any managers KPI’s. Particularly in the current economic environment, controls now more than ever should be a priority for every business.

I enjoy working on the stewardship side of the order to cash process, particularly receivables. My experience in collection management makes it easy for me to relate to business practices, provide input and ultimately add value.

Let me help you improve your collection controls within the order to cash cycle. Working together we move your debtors department towards achieving its KPI’s in a sustainable way.   

I will be happy to help you with...

  • Needs analysis
  • Process mapping
  • Documenting new & existing processes
  • Process deployment
  • Building in-house training manuals & material
  • Providing training
  • Ad hoc re-engineering projects

Processes

Projects

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