Upstream Issues, Downstream Consequences

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The O2C process is mired with potential upstream issues, having consequences downstream, when the customer is ready to make payment. All customer problems are typically filtered through the accounts receivable department, including problems with sales, products, quality, etc.  More importantly, these problems can result in delayed or even missed payments, causing increase in DSO and […]

The O2C process is mired with potential upstream issues, having consequences downstream, when the customer is ready to make payment. All customer problems are typically filtered through the accounts receivable department, including problems with sales, products, quality, etc.  More importantly, these problems can result in delayed or even missed payments, causing increase in DSO and reduced availability of working capital.

Let’s walk through a fictional scenario, as Harry’s Widget Shop purchases product from one of their key vendors.  Harry, the owner, meets with his sales rep Patricia.  Patricia is close to her quota, but she needs this sale from Harry today to take her over her annual goal, and more importantly, make her bonus. Harry’s business has been slow due to the economy and he really only needs a small order.  The order isn’t enough to help Patricia, so she tells Harry if he orders three times as much product, she will discount the sale by an additional 5%. Harry thinks about it and finally agrees. Patricia is elated and she submits the sale via fax, but after the fax goes through, she realizes she missed the discount. “Oh well,” she thinks. “Someone in AR will catch the mistake.”

Two weeks later, Harry picks up his daily mail and receives his invoice. When he opens the envelope, he is surprised to see the invoice is incorrect.  Angry that he now has to spend his precious time resolving the issue, Harry tosses the invoice on his desk and says, “Well, if they want their money, they can send me a correct invoice. It’s not my job to fix their mistakes.”

Mike in accounts receivable is reviewing his aging and notices Harry’s account is past due. “That’s odd, Mike thinks. “Harry is never past due. Must be a stuck in cash application, they are always behind.” Mike diaries the account for next month and never thinks twice about the issue.

Another month goes by and Harry’s account is still past due, and is submitted to the credit reporting agency as past due.  When Mike sees the report of submitted accounts, he takes it to Rebecca, his manager.  “Harry is a good customer, why did we report him?”

“He’s past due,” Rebecca said. “All accounts over 30 days past due are reported to the credit agency.”

Mike storms back to his desk and sees that Harry called.  Harry is upset as he was denied credit at another company for the reported debt. “This was your mistake,” Harry said. “You need to fix it.”

Mike calls Harry and he finds out that Patricia offered Harry the discount.  Mike finally calls Patricia and says, “We need you to send an email so that we can credit and rebill this invoice”
We will stop the scenario there, realizing that this issue could go on even longer, as Patricia had no authority to approve the discount she offered Harry, so she ignores the requests repeated requests from Mike to send the email. Eventually Mike escalates to her boss, etc. etc.

Let’s take a minute to point out the problems. First, Patricia failed to notify order management when she placed the order that she offered a discount. Later we find out she didn’t even have authorization to offer the discount. Without a collection strategy, Mike failed to contact Harry on the past due invoice. Mike used his knowledge of the customer and his experiences with a delayed cash application process to ignore the invoice.  The business instituted a credit reporting process, without carefully safeguarding against potential variances that could occur. Our O2C business review looks for these types of issues and documents key processes to avoid these pitfalls.  I neglected to point out that Harry could have called and reported the error, but it isn’t the customers’ responsibility to fix errors within their vendors’ business. 

Unreported discounts, pricing mistakes, invoice errors and a multitude of other issues leads to unhappy customers and delayed payments. If we follow the logical path, Harry could take his business to the vendor’s largest competitor.  The resulting loss goes beyond just losing the stable customer. The cost of customer acquisition is also lost, as well as potentially a tarnished reputation in the market place and other internal struggles due to lost working capital.

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