Shorten the Cycle
Food and beverage supply chains can shorten the cash conversion cycle, Increase profitability with paperless ERP.
The food and beverage landscape has changed considerably over the past decade, and 2013 will also bring new demands. For example, companies will invest more money in regional production of frozen and prepared foods to ensure freshness and convenience for customers, according to a recent study by Nestle, which will surely bring new logistical challenges. With the ever-changing customer demand and need for the supply chains to run efficiently, supply chains should examine their internal infrastructure, such as their accounts payable/accounts receivable (AP/AR) solutions, to find opportunities to streamline and optimize processes.
The primary objective of supply chain management is to fulfill customer demands through efficient use of resources, including distribution capacity, inventory and labor, while maximizing profits and revenue. However, supply chain managers may be less familiar with a critical cycle: the cash conversion cycle, or CCC, which gauges the efficiency of a company’s cash management. The CCC is often a predictor of the performance of the retailer’s stock returns and an excellent indicator of an organization’s financial health.
The CCC measures the amount of time that cash is tied up in working capital. Specifically, it is the time between a company’s spending cash and receiving cash for each sale. It follows cash through an organization, beginning as inventory, transitioning to accounts payable, moving through sales and accounts receivable and then back into additional cash for the company. In the operating cycle, the CCC is the interval between the time when the company disburses cash to its suppliers (removing debt to suppliers and decreasing cash flow by a given amount) and collects a given amount of cash from its customers (removing credit from customers and decreasing accounts receivable by that amount).
Investors use the CCC in conjunction with other measurements (e.g., days in inventory), to determine the overall health of a company and the competency of its inventory management, accounts receivable and accounts payable departments. It is an important gauge of efficiency. For example, according to an analysis by Forbes, “the best stock returns over the past five years were generated by the (retail) firms that manage their cash conversion cycle the most efficiently.”
While the cash conversion cycle is also impacted by investment and finance activities of the company, a supply chain will want to shorten (lower) the CCC so it can obtain the cash for its investment in inventory more quickly. An efficient CCC allows a business to remain ahead of competitors; to showcase a healthy company for potential customers and investors; and to spend more time on business-growth activities like sales and marketing.
Obtaining these kinds of efficiencies, however, proves difficult for some organizations, especially AR/AP departments that still must deal with literal paperwork instead of digital purchasing and payment documentation. Many suppliers receive paper purchase orders and submit paper invoices. These documents must be managed by human hands and are subject to many errors and delays, from faulty manual entry of purchase and sales data into a digital system to invoices becoming buried in someone’s inbox.
Most food and beverage enterprises have some sort of ERP platform, but the majority has not yet integrated that technology with available document management systems that digitally scan, store and retrieve all paperwork associated with a purchase or sale. Paperless ERP also enables much, or all, of the AR/AP routine to be automated, internally within the department and externally between all suppliers, partners and customers.
A paperless ERP solution can contribute to a more efficient cash conversion cycle in many ways:
- It automatically captures and manages data and enables access to that data more quickly. When the organization uses Web-based technology to furnish a portal to suppliers, those vendors can submit invoices directly to customers electronically. The system then can update accounts receivable and payable automatically and route the correct digital documentation through workflow steps to the next person who needs to respond to it.
- The company saves time and money by eliminating the manual labor associated with paper processing. For some large food and beverage organizations with numerous local outlets or franchises, that expense can be massive. For example, one Midwest grocery distributor processed more than 3,500 invoices per month and more during the holidays. When the company enabled a paperless procure-to-pay capture and Web-based workflow application, it generated an $80,000 ROI one year later, due to increased purchased orders processed without the need for additional staff.
- The entire AP/AR process is simplified. Paperless ERP technologies – which are often cloud based – replace paper files, interoffice envelopes and couriers with digital documents that move themselves at electronic speeds. The solution also can create an automated workflow process. Each document that requires approval, payment or the generation of a communication to a customer moves through the AR/AP department in a prescribed fashion. After initial examination, documents are directed to the specific individual responsible for the next step. That staff member must complete the step before the document can continue. If the document is ignored, the system generates an alert that the document requires attention. No longer does a manager need to focus on moving documentation along. The payments can be made electronically and tracked in the solution to refine the process.
- Data becomes more visible in a paperless ERP solution. Paper often creates an accounting blind spot: when accounting staff does not know where documents reside -or that they exist – the accuracy of financial reporting can suffer. Hundreds of bills may be sitting on the desks of district managers, and accounting is unaware that this financial burden is out there. As a result, executives cannot generate accurate financial predictions – they are seeing an incomplete subset of transactions that exclude those in process. A cloud-based paperless ERP solution can produce the most up-to-the-second data for management reports, customer and vendor inquiries and other purposes. Managers can spot trends more quickly and easily and can make adjustments earlier, preserving cash flow and profitability. Less time is spent responding to calls from clients and vendors and more time selling, marketing, planning and carrying out other profit-producing activities.
Ready to Invest
In this light, the ramifications of the CCC formula become more apparent and more amenable to the organization’s control. Organizations find themselves eager to invest in inventory, because they know they can accelerate payment of receivables through the automated internal processes built into paperless ERP. With receivables coming in faster, the accounting department can pay suppliers on time and take advantage of dollar reductions offered by suppliers for timely payment of invoices. The process transforms late fees into early discounts.
The amount of time a business takes to turn cash into more cash is a revealing sign of how efficiently the accounts payable and accounts receivable departments can manage cash flow. Paperless ERP software provides a way for businesses to increase the efficiency and effectiveness of their AP/AR departments and, thereby, their cash conversion cycle. The technology decreases the time needed to process incoming and outgoing invoices and allows accounting departments to better capture, manage and access data through an invoice’s lifecycle.
This increased data capture and accessibility enables real-time visibility throughout the entire CCC, not just when cash finally changes hands, allowing executives to make sound decisions, based on accurate information, at any time during the process. Further, companies save time and money by eliminating the need for paper processing and mailing, and the overall business process is simplified.
In order for food and beverage supply chains to prepare themselves for what’s next, now may be the time to consider one more cycle: a re-cycling of the accounting processes to take full advantage of paperless ERP.
Nick Sprau is vice president of marketing for Metafile Information Systems, Inc., an independent provider of paperless document management applications serving middle-market and large businesses. For more information visit www.metaviewer.com.