Account Receivable: In the times of downturn

 |  Jul 29, 2020

Account Receivable: In the times of downturn

Getting paid on the invoices and keeping the cash flowing: easier said than done, even on a normal day. Always marred by delays, disputes, process issues, misplaced intents, ERP limitations, and many other such challenges. Results: high DSOs, high to a very high effort by the collection teams, high costs, and heartburns in managing disputes, high efforts in managing the working capital, write-offs.

If this was the case earlier, things just got further ‘interesting’ in this ‘post-COVID-19’ world! All the businesses – are already seeing these demand shocks i.e. a sharp reduction in sales and hence the revenues. From an order-to-cash perspective, this translates into severely reduced top-lines and hence a strong need for a very proactive and yet empathetic approach towards collections. This is the only way that businesses can ensure not just continuity but also regain profitability!

AR Business Post Pandemic Success
CSA Research

So what can businesses and finance leaders do in these periods of “customer-related turbulence”? Well, the answer is not very complicated. First, get out of the denial mode ASAP. Acknowledge that the current environment will change many aspects of doing business – collections are one of the most critical ones. Second, take action to streamline the things that you were putting away before. Again, especially in the AR! But the good news is that the answers to “what can we do” questions are similar to the ones you had before. It’s just that the impact and magnitude have changed! Here are a few strategies that organizations need to quickly put in place :

Your existing credit management approach just got riskier.

Re-Evaluate your risk assessment and management process.  Many things are certainly going to happen in the next few weeks:

  • Onboarding new customers at scale and speed. And they will have to be supported with credit.
  • Existing customers coming back to you asking for credit extension.
  • Channels and partners also making a similar request.

Recalibrate your credit policies – if you have one. And Create a credit policy – if you don’t have one. This is critical since you have to treat the partners and customers empathetically – while ensuring business continuity, in the changed scenario.

Mitigate your risk by giving all the tools a re-look – Pre-Screening, bureau reports, financial statements, reference checks. Including the go/no-go thresholds. Or maybe invest in new tools that will give you more and deeper information about the clients. One way or the other, it is important to ensure a tight credit process – and best credit decision making

Collections will be hard to come by. Re-evaluate your collections management process

No. ERP and just sending reminders were not sufficient before – and they are not going to be good today.  Enhancing collection effectiveness is critical – especially in these troubled times. Late payments and what have you. This is an opportune time to not just re-look at the process but also give it some seriously needed steroids. Some of those ‘collection-boosters’ to the process can be :

  • Create an end-to-end collections workflow – beyond the ERP workflow that came in bundled for you. 
  • Ensure that even the smallest data points are captured and are used for making decisions – especially if they give a hint of the behavioral aspects of AR (top reasons for client delays, for example). 
  • Make the AR process and the relevant data is made accessible to all the relevant stakeholders – sales, finance operations, collections, etc – even if they are remote (well…especially of they are remote!)
  • Experiment, Communicate, Repeat. Businesses are likely to make a lot of changes to the client collections process. Providing enhanced credit limits or creating incentives for early payments, getting payment advice or managing disputes or even providing e-invoicing, etc – the success of all these initiatives will depend upon not just on the ability of your existing solution but also on communicating these effectively and consistently. 

Automate, Automate, Automate. Not just for today!

This one is for the teams – for now – and for the business improvement going forward! Remote working is a norm – and is fast becoming a mission-critical requirement. Not just taking care of the repetitive processes that the teams have to do daily, but also some of the key processes can also be automated – bringing down costs of collection substantially. In fact, the entire invoice to cash cycle can be improved via automation – and giving your ERP a much-needed breather. Some of these aspects of collections process that can be improved via automation are:

Pre-Collection :

  • Invoice creation – after collating data from multiple documents and sources
  • Invoice delivery via email and/or dedicated client portals. 
  • Invoice receipt acknowledgment, reminders, escalations and managing the responses to these
  • Managing collection tasks and activities 

Collection :

  • Providing options to clients: Bulk Pay, Pay Now via payment gateway, NACH, etc
  • Providing Pay Later options via providing receivable credit.
  • Providing Pay Early discounts (aka Cash discounts) 
  • Managing issues and disputes.

Post Collection :

  • Capturing client payment advise
  • Match invoice to payments.
  • Manage issues and disputes that arise because of mismatches.
  • Apply CNs, DNs, etc

In summary : Automation = Cost Savings + Employee Satisfaction + Client Satisfaction

Time to open your eyes to newer possibilities of reducing DSOs. Smart Tools, technologies to boost your existing ones

DSOs have a way to creep up and give nasty surprises. And now there is one more reason for those delays in payments. But this is not the one that businesses can wish away – it is there to stay for a while and one can only prepare. Using smart AR Management tools. What are these? Well, they encompass some or all of these ‘features’ :

  • SaaS/Cloud-Based:  Provides access to information irrespective of time and location – lockdown or no lockdown. And it’s not just restricted to the management. These are solutions that provide operational tools to the various internal teams and the customers too. Always on, real-time.
  • Ecosystem integration: Integrates with the existing ERPs, CRMs, and other tools that are used currently – complementing them and not replacing them. 
  • Analytics-Driven:  The AR solution need to not just provide insights – but actionable insights. Providing insights about not just the transactions (how much is being paid, how many invoices are delayed, what type of disputes are being raised) but also about the efforts being put in (how many times the invoice was chased, which channel is the most effective, which collector is the most efficient etc) and the client behavior ( when does the client usually pay, how many times they promise to pay has been broken, what are the dispute patterns etc.

These data points when combined with technologies like Machine Learning – lead to deeper insights like :

  • Which customer has more propensity to default?
  •  Forecasting most likely collection amounts.
  • Which group of customers behave similarly?
  • Which incentives are likely to result in early payments?

With each transaction, the system learns and calibrates the process.  As many experts are stating – and as we are seeing it unfold in front of our own eyes, this ”black swan event” will leave a legacy.  The normal paradigms have already shifted.  In everything, we are speaking of the new normal.

Re-thinking AR in this new reality is critical. At the same time, its important to not just react and take short term, tactical measures, but to invest in long term improvements that will ensure larger strategic benefits.

Remember, the reactive approach can help you survive. But a pro-active one will ensure that you thrive. Even in uncertain times.  

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