“The three most dreaded words in the English language are ‘negative cash flow’.”
- David Tang
As anyone who’s ever had bills to pay would know, striking the correct balance in what cash comes in and what goes out is essential to survival. Every business incurs hundreds of expenses to run efficiently: from salaries of the staff, to the electricity bill, or even new coffee bags for the coffee machine. If this steady outflow is not met with those wonderful credit SMS notifications in your account, the business has to either cut expenses or look for alternative short-term and long-term funding options.
This is where the cash conversion cycle (CCC) comes into play – a key performance indicator that maps your journey from the supply of your product/service to receiving the dollar bills for it. The CCC helps indicate the liquidity of your cash flows, enabling you to determine what’s benefitting or hampering it. This process starts by identifying and controlling three critical variables:
- DIO (Daily Inventory Outstanding)
- DPO (Daily Payable Outstanding), and
- DSO (Daily Sales Outstanding)
When it comes to DSO, the first step for every business is to take the Credit Risk Assessment (CRA) seriously. Companies often tend to overlook this mainly because of the enormous manual burden it involves. Gathering data on the clients that depict their credit history and reviewing thousands of paper-based credit application requests make it extremely tough for credit analysts to create time for fulfilling all these formalities. In fact, according to a survey, almost 33% organizations are short on time to do even basic due diligence for assessing the credit reliability of potential clients! However, one just cannot ignore this CRA process because faulty credit estimations lead to increasing DSO, and eventually, bad debt.
What Are The Proven Ways To Minimize The DSO?
- Leverage technology in your finances
The biggest barrier for assessing credit risk of clients is the sheer manual effort and paperwork involved. Make this manual process digital and witness the magic for yourself!
Filling credit applications online, integrating them with various credit agencies, and incorporating security measures through digital signatures will become a cakewalk. Plenty of online tools exist that can calculate credit scores as well as credit limits for your clients in a highly automated manner!
- Combine your credit workflows
Every month, credits analysts are burdened with hundreds and thousands of accounts for credit reviews for both existing and new customers, and unfreezing the frozen orders. This ever-increasing volume of records makes it nearly impossible for credit analysts to review all accounts, leading to inaccurate assessments.
CRA can be successful only when subjectivity is eliminated and these workflows are combined into a single system. The periodic task lists created for analysts will lay down all of the formalities to be covered by credit analysts – including new customer credit applications, periodic credit reviews, release requests for blocked orders, alerts on bankruptcies, and so on.
- Rethink your invoicing process
Manually printing invoices and having them delivered to your clients by mail is not only an extremely time-consuming process, but also an expensive one. Electronic invoicing helps minimize the cost and the labor involved.
Several studies have indicated that firms that use electronic invoicing have been able to bring down their DSO by 3-10 days! Here, having a portal that helps you with invoicing and customer payments will minimize time and resource wastage in the collections process. Also, your customers will have access to a centralized online storehouse of all your invoices, making recordkeeping significantly easier.
- Follow up, follow up, follow up!
Almost 30% of a credit analyst’s time is dedicated to deciding and curating a list of customers to call. Incorporating analytics and automation tools can significantly reduce the level of manual work involved in deciding which customers to follow up with. For instance, automated reminder applications will immediately notify you when an invoice is past its due date, while simultaneously sending an automated payment request to your customers, saving precious time!
Personal contact can be reserved only for the high-risk customer segment.
- Enhance your collections correspondence
One of the biggest problem that most organizations face is to successfully cover all accounts, given the medium of contact is essentially through phone calls or physical mails. Oftentimes it so happens that collections analysts tend to overlook a vast number of accounts while focusing on invoice value and aging data. As a result, they end up calling a lot of customers who’d have made payments anyway. In such a case, incorporating automation within the collections system will allow analysts to prioritize the accounts according to their risk factor.
- Eliminate waste from deductions process – automation is king!
According to a study, about 90% of deductions are valid, and nearly 60-80% of these deductions pertain to trade promotions. However, whether or not the deductions are valid or invalid, analysts end up devoting a significant amount of time in resolving them.
Automation algorithms can help eliminate all the valid deductions, thereby reducing the reliability on manual work. Furthermore, automation can provide delivery proof and backup of aggregation for claims.
Remember, the faster the deductions process, the quicker will be the cash collections. This will ultimately lower your DSOs!
- Create a connected platform for credit-to-cash cycle
When there is disoriented functioning between your credit and AR department, it has serious consequences on your cash flows.
Do what top organizations across the world are doing – leverage the power of integrated systems that can reveal patterns based on previous sales orders and help smoothen out the blocked orders by sending automated correspondence to credit analysts to notify about the blocks in the system. As a result, the client can access any invoice within his portal and make payments.
Are outdated manual collections processes coming in the way of your cash flow…and growth?
If manual processes and delayed collections of payments are hampering your cash flows, you need Numberz more than you thought!
Analytics Powered Through Machine Learning
Numberz is an analytics-driven, secure, online enterprise solution that helps you achieve your collection goals! Our smart ML technology integrates seamlessly with your ERP software to help the AR management team analyze the historical customer data and categorize them into high and medium-risk segments. It also allows credit analysts to predict the risks associated with your customers and make appropriate adjustments to the credit policy of the company. Numberz will automatically schedule reminders for your invoices, as well as assess the risk of default for your customer segments so that you can focus your energies on other core aspects of your business.
The Numberz Advantage
Numberz is a cloud-based solution that allows you and your clients to keep track of all the payments along with their corresponding invoice and adjustments details. So, you no longer need to keep the bulky stash of paper invoices. This is just the tip of the iceberg. Automate and accelerate your cash flows today by visiting numberz.co. Feel free to get in touch with us!
Attain Consulting Group
The Robert Half study