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Three Reasons Why Quote to Cash is Better than Cash Conversion.

  • By Bryan Lapidus, FP&A
  • Published: 7/6/2017

How long does it take to convert buying interest from a customer (measured as when your company creates a price quote) into cash in the door? This question underlies the quote-to-cash (QTC) metric. It captures the interrelationship of the end-to-end sales process—sales, marketing, fulfillment and collections—in a way that is not visible when looking at individual components. It is a measure of the velocity, where a shorter cycle translates into an increased opportunity to re-market to the customer.

QTC also underlies an increasing number of webinars, white papers and software ads that are filling up my email in-box! All of this prompts three questions:

  • Why is QTC coming into focus now?
  • How does QTC differ from other cash velocity measures?
  • What does FP&A need to know about it?

QTC sounds similar to a standard financial analysis called the cash conversion cycle, which also seeks to measure the velocity of money through the organization. The cash conversion cycle is defined as:

(Days of Inventory) + (Days of Sales Outstanding) - (Days Payable)

Put differently, the cash conversion cycle is the cash available after considering the money tied up in assets—physical inventory or accounts receivable (collections)—versus money going out the door in the form of accounts payable. The shorter the time, the better for the business because it increases your working capital. Some companies can go negative, for example, if they sell software (no inventory), are paid on sale, and can pay their suppliers net 30 days.

Quote-to-cash is different in several ways. First, it is distinctly focused on the sell-side of the business—inventory and payables are excluded. While definitions may vary slightly, it starts at the beginning of the sales process with the CPQ—configuration of the offer, developing pricing, and creating a quote. From there, it may include negotiation, contract review, financial review, sale, invoicing and receiving payment. QTC, then, measures the ability to generate revenue.

Second, QTC is both a process as well as metric. It puts the customer at the center of various internal steps and shepherds that customer to payment. As such, it engenders itself to process redesign and IT solutions. There is a data issue of linking various analyses to a nugget of customer data: billing, order history, customer service calls, market promotions.

Common Elements in the QTC Process

Department Impacted

Capture order details (price, promotion, payment, quantity, configuration)

Sales

Consolidates orders across channels

Marketing

Provides a portal for customers to view their order information

Customer Service

Creates orders

Warehousing / Inventory

Coordinates fulfillment

Shipping

Manages state sales tax

Accounting

Integrates with ERP for inventory, booking revenue

Inventory, Revenue Accounting,

Maintains customer information

Marketing / CRM

Shares information across systems

IT

Provides management reporting

Not previously available


In a B2B setting or a complex contracting business, this might be seen by moving a quote through various levels of approval with workflow automation, improving data accessibility and even suggesting contract language and financial analysis.

A third difference is the application to e-commerce, especially direct to consumer marketing. Sales and marketing has become a competition for market share as products become commoditized and physical stores shutter. E-commerce allows for more efficient inventory management due to the combination of digitization (i.e., music), fewer inventories (i.e., no need to stock individual stores), and finished goods inventories. Also, e-commerce lives on electronic payments so the question of collections is largely resolved, excluding fraud.

The ascent of QTC and e-commerce also leverages the huge amount of data that companies have on a customer. When a customer visits a website, the company identifies that person and tailors offers and pricing to aid the sale. This helps the customer to discover what he or she likes and speeds a buying decision, shortening the QTC cycle.

QTC also links into several other departments and software systems, including state sales tax calculations, order processing, fulfillment, ERPs, and EPMs. By framing the QTC process in terms of customer and internal business data, it becomes a challenge that software vendors can exploit, and that that means opportunity for vendors.

QTC is a relatively new metric that is gaining traction due to the changes in our economy, and the substantial marketing dollars propelling the metric, process improvement and software solutions. Gartner and Forrester already review CPQ software (a subset of QTC) and note that this part of the market is growing at 20 percent per year. I am sure the QTC is not far behind.

Bryan Lapidus, FP&A, is a contributing consultant and author to the Association for Financial Professionals. Reach him at BLapidus@AllegianceAG.com.

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