The most important metric for HaaS billing: average days to send (ADS)

The most important metric in hardware-as-a-service (HaaS) billing is average days to send (ADS). ADS presents the biggest opportunity for hardware companies to improve billing operations, and thus reduce the time it takes to collect cash. HaaS companies can drive an 18x larger reduction in asset-to-cash time by improving their internal operations and reducing ADS, compared to optimizing the average days to collect (ADC) from a customer.

In SaaS, an invoice typically goes out at the same time the software is turned on. But for HaaS companies, the finance team usually needs inputs from multiple other teams. This makes the job of the finance team particularly complex.  Finance may need to take data from inventory, shipping, operations, deployment, and engineering—to name a few—in order to reconcile a complex customer contract. All this before accounts receivable can put a single line item on the invoice.

This data can be notoriously difficult for the company to track. When did an asset ship? When was it installed at the customer site? When did customer training take place? When was the software turned on? The answers to these questions are based on real world events! Which means they are often spread across emails, spreadsheets, and even text messages or phone calls.

ADS is the first step of two steps to turn assets into cash

Average days to send (ADS) is the number of days it takes a company to send its invoices. More technically: ADS is the number of days between the earliest date a line item could have been invoiced and the actual date an invoice is sent with that line item on it.

ADS is a sister metric to average days to collect (ADC), which is how many days it takes an invoice to be paid. Specifically: ADC is the number of days between when an invoice is sent to the customer and when full payment is received for that invoice.¹

Most finance teams focus on ADC because it’s easy to track, a well-known metric, and commonly used in SaaS. But ADS is the biggest opportunity for HaaS companies to improve their billing operations. This is true for two reasons:

1. ADS is usually bigger than ADC. Focusing on improving ADS rather than putting efforts into improving ADC means a bigger return on investment and bigger reduction in asset-to-cash time.
2. ADS is easier to take action on than ADC. Companies fight tooth-and-nail to reduce receivables from 45 days to 44 days (1 day faster!), though they have little control over when customers pay. Meanwhile, internal operations drive a long process to get invoices out the door. Measuring and improving ADS—which HaaS companies have control over—could mean an improvement from 60 day to 5 days (55 days faster!).
   

Steps to measure and improve ADS

The only way to get a handle on ADS is to start measuring it. Until companies start to measure ADS, they cannot really improve it. ADS is measured for each line item on an invoice. Simply calculate four time periods that occur between asset activity and invoice sending:

1. Time between real-world asset activity and when that activity is recorded
2. Time between when asset activity is recorded and when that data is reported to Finance
3. Time between when Finance receives data and identifies that the activity is billable
4. Time between when Finance identifies billable activity and sends out an invoice with the line item

Add up these combined windows of time to determine total ADS. From there, companies can start optimizing. Which of these four is the biggest? Which of the four is easiest to improve quickly? Maybe it’s the time between asset activity and recording; maybe it’s the time between when Finance gets the data and identifies the activity as billable. The key is to observe the gaps, and tighten up operational performance as much as possible.

This is why it makes sense for HaaS companies to focus on accelerating ADS. Often companies spend thousands of dollars to optimize ADC by 10%—hiring accounts receivable or collections professionals to nudge customers to pay more quickly—which ultimately means improving a 45-day ADC by less than 5 days. But companies could get their invoicing and billing automated instead, and improve ADS by 100 days.

Drive ADS to zero with Hardfin

The four-step process outlined above—and what’s required to optimize each window between milestones to improve overall ADS—can be done manually. But it requires ongoing cooperation of every department in a HaaS business, so it takes a lot of work.

A more efficient, less error-prone, and lower cost option is to use an integrated software package that automatically measures these windows and reports opportunities to streamline. Hardfin knows whether it takes 1 day or 12 days for your Shipping department to tell your Finance team that devices have shipped. That’s because Hardfin is designed from the ground up to manage the contract-to-cash process for business based around assets.

By connecting asset tracking to the billing engine natively, companies generate invoices immediately upon asset activity. Finance is alerted any time an invoice is ready to send—meaning A/R teams no longer need to set aside the 1st of the month to go through every contract and invoice (and start off an average of 15 days behind on billing!). They just click “Approve” and the invoice is sent in real time—driving a large reduction in the cash-collection cycle and a huge improvement in cashflow.

Hardfin helps hardware-as-a-service businesses turn assets into cash as quickly as possible. It is possible to get ADS to zero when assets and billing are natively linked. Want to start measuring ADS and improving your billing operations? Reach out to talk to one of our experts. We’d love to chat with you.

 

Ready to improve your cash collection cycle and reduce the time it takes to turn assets into cash?

1. Average days to collect (ADC) is similar to days sales outstanding (DSO), which is also commonly used as a measure of cash collection performance.  While similar, the two are measured differently: ADC is a measure of actual days taken for each invoice to be collected, while DSO is a formula based on balance sheet accounts.