Best Practices for Effective DSO
Management and Reductions in
Past Due Receivables
Paul J. Clausen
Corporate Director, Customer Financial Services
Emerson Overview
•
Founded in 1890 – in business for 124 yrs
•
•
Diversified global manufacturing and technology
company.
Business grouped by segments:
•
•
•
•
•
–
•
2
Process Management
Climate Technologies
Network Power
Industrial Automation
Commercial & Residential Solutions
Emerson has approximately 135,000 employees
and 235 manufacturing locations worldwide.
Headquartered in St Louis, Missouri, USA
St. Louis headquarters
•
Publicly traded (NYSE : EMR)
•
Global product and market leadership
•
Recognized for engineering capabilities,
outstanding management process, and
record of consistent long-term performance
•
Sales of US$24.7 billion in fiscal year 2013
FY 2013 Sales By Business Segment
Process Management
Network Power
Industrial Automation
Climate Technologies
Comm. & Res. Solutions
Eliminations
Total
Sales
FY 2013
FY 2012
$8,610
$7,899
6,155
6,399
4,885
5,188
3,876
3,766
1,864
1,877
$25,390
$25,129
(721)
(717)
$24,669
$24,412
Δ $'s
$711
(244)
(303)
110
(13)
$261
(4)
$257
Diversified Portfolio of Companies
Continuous Portfolio Management Drives Growth!
3
Δ%
9.0 %
(3.8)%
(5.8)%
2.9 %
(0.7)%
1.0 %
0.6 %
1.1 %
FY13 Sales by Geography
6%
6%
44%
24%
20%
37% Emerging Markets
4
US & Canada
Europe
Asia
Latin America
Middle East/Africa
Operating Cash Flow Drives Shareholder Value
3.6
3.3
3.1
3.2
$ in Billions
3.1
63%
56%
FY2009 FY2010 FY2011 FY2012 FY2013
5
OCF
Shldr Payout
Receivable Landscape

32 Reporting Business Units that
operate autonomously
–
Each have their own President, CFO etc.
• Credit function reports to BU CFO


6
Business systems vary across the
operating units
–
Oracle
–
SAP
–
JDE
–
Various other ERP platforms (some home
grown)
Operate globally in 78 countries
–
Transactions in local language and
currency
–
Majority of collections are supported in
best cost locations
BEST COST RESOURCE UTILIZATION
XIAN
CLUJ
MANILA
Perfect Execution….


A challenge to everyone in the company to better
understand our customers and then work and
think in different ways and at new levels on their
behalf
A cultural transformation that…
– Reduces complexity
– Breaks down silos
– Strengthens collaboration across our organization
7
How Does Perfect(Ex) Apply to Receivables
Management?
Our Receivables Effort Has Been Broad...
Implement Corporate
Sponsored Software
Tools To Support The
Effort …
Involve Executives
To Call On Key
Accounts…
8
Utilize Best Cost Resources &
Shared Services…
Current Focus Evaluates Processes &
Execution…
Managing
Disputes
1. Cash Cycle
Elements
2. Supportive
Processes
Collections
Processing Payments
Billing
Credit Risk & Exposure
Executive Oversight
Methodology: Best-Practice Benchmarking
− Emerson & Industry
− 47 Elements Examined
9
So What Happened in FY2013….

Incorporating the principles of Perfect Execution, we developed a process of evaluating a
business unit’s performance based on defined best practices
–
Best Practices were cross functional and looked at all elements of the cash cycle
OBJECTIVES

Understand and evaluate a B.U.’s processes, structure and overall approach to DSO
management

Focus on Past Due reduction

Provide a set of recommendations (roadmap) for improvement
CONSIDERATIONS
10

Credit policies and execution

Cross functional interaction that supports receivables

Executive involvement and focus given to DSO management

Understanding reasons for past dues and corrective actions employed

Dispute management processes and analysis

Establish what sales policies are in place that support receivables

Is there automation in place and how is it used to support Receivables
DSO Prioritization / Performance Model…
F
O
C
U
S
BUSINESS
PROCESS
Perfect
(Ex )
Actions
Tracked
Early X-Functional
Communication
Root Cause Analysis &
Corrective Action Taken
Managing
Managing
Disputes
Disputes
Rapid Remittance Posting
Frequent Customer Contact
EXECUTION
Processing
Receipts
Credit/Sales Proactive Efforts on Terms Approval
Billing Process
POLICY
Policy & Escalation Procedures
Sales, Credit, CS Collaboration
Managing
Collections
Effective Credit Risk Policy
O
N
Projects?
Account
Reviews
Frequent Invoicing
Consequences For Slow Paying Customers
Supportive Sales Policy
& Interaction
E
X
E
C
U
T
I
V
E
O
V
E
R
S
I
G
H
T
Credit Risk & Exposure
Comprehensive Policies, Finance Lead, Supported Cross Functionally, & With Executive Meetings…
11
To Support the Objectives, on Site Visits Were
Required With The Business Units…
ANALYSIS METHODOLOGY

Review various materials requested from the B.U. prior to an on-site visit
–
Written policies covering risk, collections and dispute management
–
Standard terms and conditions
–
Standard payment terms
–
Most recently completed ICQ
•

Documents reviewed on-site:
–
Organization structure of Finance
•

12
Sales and AR tabs only
Including the Credit function
–
Key management organization structure
–
Paretos for past due and or dispute reasons
–
KPI’s produced to measure:
•
Collections productivity
•
Past Due issues
•
Dispute Issues
•
Progress on corrective actions presented at most recent Pres. Council, Perfect (Ex) or Profit Reviews
Includes Actions to Resolve
The analysis is completed using Benchmarking tool while on site
What is The Benchmarking Tool?

Compares a B.U.’s performance to industry & Emerson best
practices for the elements of the cash cycle
– Credit risk, billing, processing receipts, collections, managing
disputes….
– Identifies gaps and opportunities


Also considers sales policy and support, customer account
reviews, executive oversight and influence on receivables
management
Identifies “Must Have” capabilities to build a foundation for
performance in DSO management
– “DSO Performance Pyramid”

Considers the degree of automation employed to support
processes
– Is data being collected, analyzed and actioned?
13
BEST PRACTICE DSO MANAGEMENT IS NOT JUST A
FUNCTION OF FINANCE…
IT IS AN ORGANIZATIONAL ISSUE
Benchmarking Template
DSO - BEST PRACTICES ASSESSMENT
Business Unit: Emerson Network Power - Asia
Date: July 22 - 24, 2013
Oversight
Deviations
Collection
Region:
= Essential
Pre-Collection /"Foundation"
Instructions: Please enter the number (1, 2, or 3) that best describes the current degree of adoption for each of the best practices listed below.
CURRENT ASSESSMENT - DEGREE OF ADOPTION
PROCESS BEST PRACTICES
BEST PRACTICE EXPLANATION
3
SCORE
1
2
No Policy
Policy inadequate
No reviews
Reviews take place; no
scorecard
Reviews take place minimum of
There is a continuous process for monitoring customer accounts to enable ongoing adjustments of credit
quarterly, and scorecards utilized
assessment. Credit risk scorecards use multiple factors to categorize risk and to establish credit limits.
w/ multiple scoring factors
Credit limit exceptions process in
There are tight controls of credit limits that are maintained in the ERP system. Exceptions are approved
place and documented in policy
based on the credit policy LOA.
and evidence it is functioning
PRE-COLLECTION
MANAGING CREDIT RISK & EXPOSURE
Credit Mgr/Dept Head
Policy in place with evidence to Policy that defines establishing credit for new and existing customers, limits of authority (LOA), credit hold
support
process, escalation and terms management.
1
A defined credit risk management policy is utilized.
2
Regular and periodic account reviews are performed, and credit risks
scorecards are utilized.
3
Credit limit controls are in place.
No credit limits in place
Credit limits in place in
ERP system
4
Effective customer data management is in place.
Ownership and
governance not defined
Credit approves bill to
customer set-up before
entered in ERP
Credit Dept. owns customer
master, customers not set-up
without a P.O. Policy and
governance in place
5
Account updates and credit risk changes are shared and coordinated with
other business units.
No sharing
Some sharing, no
formalized process
Documented process with
evidence it is functioning
Ownership and governance of customer master data is defined and includes Credit department as part of
the process.
Within the business group, as well as across business groups or corporate where there is a common
customer.
BILLING PROCESS
Credit Mgr/Dept Head
6
There is no ambiguity between payment terms and conditions on
customer contract or PO and the payment terms in the ERP system.
No Process exists to
ensure consistency
Process but with
exceptions
Process functioning without
exceptions
7
Frequent invoicing.
No defined process
Process but with
exceptions
Daily invoicing, no exceptions
Invoices are issued at time of shipment, when services are performed, or acceptance as defined in contract .
8
Standard invoice format.
Invoices manually
generated via Excel
ERP generated but with
exceptions
ERP generated, no exceptions
There are clear and concise invoices with formats that are designed to minimize errors made by customers
A/P, lockbox banks, and cash application personnel.
9
Automated invoice delivery processes are in place.
No automation in place
Some automation (EDI)
Fully automated process with
Utilization of automated processes to deliver invoice to customer in the most efficient and timely manner
established program to drive
possible. Processes should minimize reliance on postal service delivery as primary method of delivery for
customers to electronic delivery
invoices and related trade documents.
vs. paper based delivery
Some interaction takes
place
Interaction does take place and
evidence supports that credit is Credit Managers participate in sales meetings and other opportunities to communicate importance of cash
part of annual sales meetings, flow and expectations to ensure customers pay Emerson according to agreed upon terms. *
training and collaboration efforts
Invoices are consistent with PO's and contracts.
SUPPORTIVE SALES POLICY & INTERACTION
10


Credit Manager meets with Sales to review importance of DSO and
Emerson focus on cash flow.
–
Cross functional
–
Follows the DSO Performance Model
Assessment is based on 3 point scale
Assesses the degree to which the BU has adopted a particular best practice.
•
14
No evidence to support
credit is engaged
46 Identified best practices
–

Credit Mgr/Dept Head
Not intended to be critical of current processes or procedures
Recommendations are based on degree of adoption
–
Short term focus on the “must haves”
–
Long term focus on strategic initiatives
Sales Mgr/Head* CFO** GM***
From The Visit, Develop Priority Based Actions
For BU’s, Roadmap for Improvement…
Long Term Actions To Receivables Excellence
Short Term Actions
RECOMMENDATIONS
PRE-COLLECTION
MANAGING CREDIT RISK & EXPOSURE
1 A defined credit risk management policy is utilized.
2
Regular and periodic account reviews are performed,
and credit risks scorecards are utilized.
There is no structured policy that defines how credit risk is managed by the shared services team. Customers are set-up before an order is received with a default credit limit of $1,000 USD. The only review that
takes place is when an order is entered >$1,000. The analysts get a notification on their credit review screen. The only reviews that take place are when an order exceeds the credit limit, an eRAM packet is pulled
and the score is updated based on the seeded EMR Scorecard in eRAM. RECOMMENDATION: Establish a comprehensive Risk Management policy that defines process flows and expectations on managing Risk,
Order Hold Management, Account Reviews, Escalation Procedures and limits of authority for approving limits and overriding credit decisions.
Current process only requires a customer review when a customer exceeds their credit limit. RECOMMENDATION: Establish a process as part of the Risk Policy whereby regular and periodic reviews are taking
place. Utilizing the account refresh tools available in eRAM is a best practice for updating customer risk information. Utilizing the scorecards in eRAM, and using the Filters function in eRAM, will allow for
segmenting the customer base based on Risk Bands. Changes in Risk can then be highlighted to adjust collections policy and strategy based on this changes in Risk. For higher volume customers, financial statement
reviews should be conducted on an annual basis at a minimum. For those customers that are publicly traded, there is a Corporate resource available in Manila for doing these analysis for the B.U. Adjustments to
the review frequency are determined based on this analysis. (i.e. Quarterly, semi-annual or annual).
3 Credit limit controls are in place.
The current ERP system does have functionality to place an order on hold if the customer credit limit is exceeded. However, Customer set-up is controlled by another functional area. Current procedure is that if
the customer set-up is for a "Bill to" or "Sold to" entity, the entry personnel are instructed to default the limit to $1,000. There is no control in place to ensure that the credit limit value being entered is correct.
RECOMMENDATION: The Credit function should have control of customer records being entered into the ERP system if the usage is for a "Bill to" or "Sold to" entity. ,This allows the Credit function to ensure that
the proper credit limit is established at the time of set-up, that we are not creating redundant records in the ERP system and that the proper relationships are defined for those customers that have multiple
locations.
4 Effective customer data management is in place.
Refer to #3 above. In reviewing the customer set-up process with both Credit and Customer Service, ownership for the customer set-up process is not clear. Customer Service was of the understanding that Credit
controlled this process; the Credit function indicated it was done in Costa Rica, but were not aware of ownership for the process. RECOMMENDATION: Establish a procedure and policy for approving and entering
customer data into the ERP system. The policy should define the Credit function as having ownership for Bill to and Sold to customer set-ups to control the credit limit and terms set-up. The policy also should
define governance and standards to keep the database clean and minimize redundancy. The customer data model should also be defined as part of this policy/process. As you migrate to Oracle, managing
customers in the TCA model can be complex, but offers tremendous flexibility in how you manage customer data in the Oracle environment. Best Practice is to define the model, define ownership, restrict access
to add and change records, establish a standards policy, and governance.
5
Account updates and credit risk changes are shared
and coordinated with other business units.
With the establishment of the Shared Services Credit function for ENP North America, the legacy Services, ERS/HVM and Product credit and collections are managed by the Shared Services organization. There is
significant overlap in the customer base between service and product. However, prior to the consolidation under shared services, there was no evidence of sharing customer data across business units within the
ENPS group or Emerson. RECOMMENDATION: As part of your policy development, expectations about establishing a discipline to share data about problem customers across the business group, and Emerson is a
best practice.
BILLING PROCESS
There is no ambiguity between payment terms and
6 conditions on customer contract or PO and the
payment terms in the ERP system.
Contract review process is driven by legal, and all T&C's are managed and approved with the exception of payment terms. Credit is only brought into the process when contract specify's non-standard terms. At that
point, there is no opportunity for Credit to engage in other T&C issues that may impact the collection process. RECOMMENDATION: Best practice engages the credit function up front during the negotiation process.
The collections process in many cases uncovers contract language that impedes our ability to collect payments when due. Involving the Credit function in the contract negotiation process provides the opportunity
to identify restrictive language that impedes collections as well as resolving payment terms issues before the contract is signed. Develop a template or checklist that includes all functional areas of responsibility to
sign off before the contract is signed will ensure we are aligned internally on the customer expectation and our ability to meet those expectations. We should have organizational alignment on payment terms
issues before the contract is stamped and returned to the customer.
7 Frequent invoicing.
Current ERP system generates an invoice file daily that produces a print invoice daily for all customers for Services and Product. Printed invoices are sorted in Columbus and those customers that are on web
invoices or require manual invoices due to AIA summary billing or other customer requirements are pulled so that a manual invoice or web portal invoice can be entered to the customers web site.
RECOMMENDATION: Short term, recommend having web portal invoice documents printed in Costa Rica. The current practice is they are printed in Columbus, sorted, and then scanned and e-mailed to the team in
Costa Rica to input into the web portals. There is no tracking of this process and therefore no assurance that the invoices are being loaded to the web portals in a timely manner. Long term: Consider implementing
the BillTrust solution. They have web services interfaces that will automate the process of web presentment. Implementing BillTrust will also standardize the invoice presentment process as Services utilizes Eaton
Forms and Product is using traditional mail services to send invoices. Implementing BillTrust now will allow for easier implementation when the business migrates to Oracle as part of the next age project. At that
time, all the set-up work, design templates and web portal services will already be established, and the Oracle work will only involve the pointing of the print queue to the BillTrust portal. For other manual
documents, other than AIA invoice requirements, this is the result of shipping from multiple ship points at different times when customer requirement is for a single shipment and single invoice as stated on the
P.O. This is a business process issue and should be managed cross functionally in the organization to identify a suitable business process that aligns with customer expectation and eliminates the manual processes
currently in place to generate these invoice documents.
8 Standard invoice format.
No recommendations at this time. Invoice formats are different between the businesses (Services, Product, ERS/HVM). Suggest looking at this if you adopt recommendation in #7 above and utilize the BillTrust
services for invoice formats. This allows you to develop common look and feel across the businesses in your invoice documents.
9 Automated invoice delivery processes are in place.
See recommendation in #7 above. Automating the process will allow you to track when the customer is getting the invoice document, eliminate delays, minimize impacts of USPS delays, and provides for a direct
link to invoice documents from the GetPaid collections automation software.
Communicate Findings And Recommendations To Key BU Personnel
(President, CFO, Financial Services/Credit Personnel)
15
What Have We Learned
Thus Far?
Benchmarking Reviews

In FY2013 we Conducted 8
Reviews
–
North America
–
Columbia
–
Brazil
–
Mexico
–
Costa Rica
–
Manila
–
Australia
–
Singapore
In Q1 FY2014 we have
conducted 8 & 2 Follow-up
Reviews

Extensive Reviews on site, usually 2 – 3 Days

Meet with:

17

–
General Manager or President
–
CFO
–
VP Sales
–
Operations
–
Billing
–
Customer Service
–
Credit Manager and staff
360° Format one on one interviews
–
Europe HQ
–
United Kingdom
–
Spain
–
Italy
–
Turkey
–
France (2)
–
Hong Kong
A Comprehensive Credit Policy Is The
“Foundation” For Good DSO’s…
Key Elements Of The Policy: • Do The BU’s Have Documented
− Clarifies Options Available If Credit
Policies Covering These Elements?
• Are They Using Automation Tools?
Limit Cannot Be Granted (For Past
Dues & Limit Overages)
− Covers New & Existing Customers.
− Clearly Defines Escalation Processes
− Who Does What, When…
− When To Stop Shipments…
− Final Authority Levels
− Defines Collections Process
− Who to Contact
− When to make the contact
− Contact method
− Follow-up and Escalation
procedures
− Covers Dispute Management Process
− Specifies Non-Standard T&C’s Approval
Process With Limits Of Authority
− Clarifies Process Flow, Documentation,
& Data Required For Approval
18
Cross-Functionally Defined Processes
Are Necessary To Support The Effort…
Elements Of a Collections
Policy:
Best Practice Example
− Cross-Functional
Processes Should Cover:
• Contact Frequency
• Escalations
• Dispute Resolution
− Identified & Agreed To
Cross Functionally
− Expectations Understood
− Cover Multiple Customer
Segmentations
• Are Roadmaps Utilized?
• Do Sales, Operations, & Executive Personnel Know
Their Roles & When To Get Involved?
19
Minimizing Disputes Improves Timely
Collections, Improves Customer Satisfaction…
Knowing Reasons for
Past Dues is Key:
Example Of The Challenge
− Quick Resolution
Policies Are Needed
− Track By Type &
Reason Code
− A Higher-Level Roll-Up
Tracking Document For
Executives
− Root-Cause Analysis
For Major Issues
Required
• Are Disputes Being Tracked?
• Are There Business Process Improvement Projects To Correct?
20
Executive Oversight Is Imperative…
Institutionalize the Process Through Regular Scheduled Meetings with
Key Executives
− Not Just The CFO’s Job
− Key Executives Should Be
Assigned To Relationship /
Strategic Accounts
− Regularly Scheduled Business
Process Meetings Should Be
Conducted
• e.g. S&OP
• Aging Reviews
• Disputed Items Review
− Reporting Must Be Targeted and
Specific
• Why is it past due
• Action needed to resolve
• Who owns the action
• Expected resolution date
21
Account Name
Terms
Last Pmt
Method
Total AR
1-7
8-30
31-60
61-90
91+
Total Past Due
Comments
1. Needs Certification document 2. Docs
356,985 being prepared by Engineering. 3. Mr.
Smith 4. July 25th
UOP LLC
NET30
Electronic
516,905
0
356,985
0
0
0
BARIVEN SA
NET30
Electronic
242,303
0
6,228
7,464
150,026
78,585
242,303
1. Chronic Past Due 2. Executive visit 3.
Mr. Garcie 4. Meeting planned in August
SAUDI POLYMERS CO
NET30
Electronic
353,219
0
112,675
0
0
0
112,675
1. Goods received late 2. Docs e-mailed
to customer 3. Collector 4. July 20th
VALTRONICS SALES INC
NET30
Electronic
348,187
45,829
53,957
(2,735)
0
0
BARIVEN SA
ADVANCE Electronic
80,305
0
80,305
0
0
0
79,067
0
0
0
0
79,067
79,067
1. Warranty Dispute 2. Need engineer to
review on site 3. Mr. Jones 4. Aug. 5th
78,119
1. Month end cutoff 2. Payment
promised 3. Collector 4. July 10th
GOVERNMENT SCIENTIFIC
NET30
SOURCE INC
Electronic
CHEROKEE
MEASUREMENT AND
CONTROL INC
NET30
Check
363,718
78,119
0
0
0
0
GENERAL ELECTRIC CO
NET30
Electronic
815,649
106,360
(22,573)
5,000
(26,827)
0
BERRY PETROLEUM CO
NET30
61,671
0
61,671
0
0
0
LAURENTIDE CONTROLS
NET30
LTD
TECNOSTEAM ENERGY SA
NET30
PANAMA
Total Top 20 Past Due Accounts
Grand Total
Grand Total %
Electronic
104,886
58,042
38,000
38,000
3,003,910
3,003,910
326,351
326,351
10.9%
0
0
649,248
649,248
21.6%
0
0
9,729
9,729
0.3%
• What Executive Lead Meetings Are Held? When?
0
0
0
0
123,199 157,652
123,199 157,652
4.1%
5.2%
1. Liquidated Damages, product late 2.
97,051 Negotiate settlement. 3. Mr. Rep 4.
not commited
80,305 See #2 above
1. Web billing 2. Invoices submitted
late 3. Collector 4. Payment promised
1. Documents required 2. Need NOA
61,671 certifcicate 3. Customer Service 4. Not
committed
1. Month end cutoff 2. Payment
58,042
promised 3. Collector 4. July 10th
1. Month end cutoff 2. Payment
38,000
promised 3. Collector 4. July 10th
1,266,178
1,266,178
42.2%
61,960
Summary….

The DSO Performance model defines those best
practices in each element of the cash cycle that
enable best in class performance
– Assessing business units adoption of these best practices
provides the roadmap for driving improvements

Applying the principles of Perfect Execution to the
receivables effort has enabled:
– Cross functional focus on receivables management
– Adoption of best practices to reduce complexity and drive
process efficiency
– Collaboration across the elements of the cash cycle to
improve customer service and better understand our
customers
22
Thank You!
Questions?