You may be familiar with the old saying, “things that don’t get measured, don’t get done”. There is a lot of truth to it, however, not everything that we can measure is useful. Therefore, what we measure should be relevant and the tools we use must be appropriate. However, in this day and age of big data and smart software, setting up an effective KPI system may become even more complicated. As the saying goes “less is more”, but when we have more data available how should we decide which data to use or not to use? In this post, I would like to explore a more integrated and business process-oriented approach towards reporting and choosing KPIs, in particular, those related to order to cash.
Let me start by saying that there is no such thing as the ‘ultimate’ KPI system. Every company will have different (management) information needs and apply different measurements, depending on which goals management wants to focus on, the kind of systems and available data. The first step is to identify the different KPI categories that apply to credit management.
- First there is credit risk. This applies to all companies that sell on credit terms. Measuring credit risk is one of the most important KPIs. After all, establishing relationships with customers who have a high credit risk i.e. are not creditworthy, may lead to serious cash inflow and profitability problems due to late payment or worse. Measuring and monitoring credit risk is therefore essential for every company.
- Second there are customer related KPIs, such as NPS (Net Promoter Score). NPS is a relatively simple KPI that tells us something about how satisfied customers are with the products and service of the supplier. There are functional links with complaint management and customer segmentation.
- Third are measurements related to cash flow. We can think of DSO and its many variations, along with less often used KPIs such as DBT (Days Beyond Terms) or PWT (Percentage Within Terms).
- Fourth we have performance related KPIs. A very common one is CEI (Collection Effectiveness Index), which says something about how effective a credit /collection department is working.
The four categories are summarized in the following table.
Source: Happy Customers, Faster Cash, second edition
It is important to understand how these different KPIs are linked to each other. Basically, it means that you need to have a clear understanding of how your supply works, internally and externally.
Understanding your supply chain
No matter what company you work for, understanding the supply chain process is essential. Especially when you professionally talk to customers about sales, deliveries, invoicing, credit notes and payments. Customers are, in fact, uninterested in how your supply chain works, they only care about what results from it. In other words: if a customer orders X quantity of product Y on a Monday, they basically want to know two things:
- Is the product and ordered quantity available for the agreed price?
- On which day will the product be delivered?
So if a sales representative promises that the product is in stock and will be delivered on Wednesday next (+ 2 days), then a customer expectation is set. Meeting a customer’s delivery expectations can be especially important when the supplier’s products are used in a just-in-time manufacturing process. However, if the salesperson does not have a good overview of the various steps in the supply chain process, this may lead to providing the customer with incorrect information, which in turn can lead to potential customer dissatisfaction.
For example, a new order for 20 units of product X with a total value of $ 150,000 is entered into the system. Inventory is abundantly available, but the credit limit would be significantly exceeded when the order would be shipped. This means that either sales or credit control are required to make a decision and/or inform the customer of this situation. To simplify things a bit, there are two options.
- The customer will be informed that the order will be put on hold / delayed until there is enough credit limit available or;
- The customer will be asked to make an advance payment of $ 50,000 (exceeding the credit limit)
In both cases, the chances are that the customer may experience this situation in a rather negative way. When this will happen or has happened more frequently it is not unlikely that it will impact customer loyalty and future sales. Of course, this is just a simple example, but there many other similar situations. So how could this be prevented?
Know your customer
It sounds so simple and obvious, but Knowing Your Customer implies that you have systems in place that are able to track or monitor your customer and that KPIs are available for employees from different departments in (near) real-time. If I am working for a credit department, ideally, what information would I like to see on my computer screen when talking to a customer about overdue invoices?
In a simplified way, what the credit controller sees on his computer screen could be this.
I understand that the reality is often far from what is described here, but with the increasing availability of APIs (Application Programming Interface), transferring data in real-time between different software applications (such CRM and Credit Management or Finance) is becoming more plausible and available from a technical standpoint.
In conclusion, when we strive to integrate KPIs from different departments, this may have a positive impact on efficiency, effectiveness and customer experience. It may not only benefit the quality of decision making within the credit department, but it may also have a positive impact on other departments that are linked to the order to cash process. At the end of the day, doing successful business is a matter of KYC and having sound systems in place. This will enable you to understand and inform the customer in a way that it contributes positively to the working relationship and business results.
About the author
Marcel Wiedenbrugge is managing director of WCMConsult. Marcel combines knowledge and experience in account management/sales, credit management, service management and related software solutions. In the past, he has worked for companies like Ricoh, Van Ommeren Ceteco, PCD Polymere, and Yamaha Musical Instruments Europe. Marcel is an entrepreneur, speaker, writer, researcher, trainer, and consultant. He develops, organizes and conducts workshops, training, and seminars. He frequently writes articles and is the author of several books such as Credit Management Software (Dutch only), The Customer Profit Maxim and Happy Customers Faster Cash. For more information go to www.wcmconsult.com