Build Back Better
Hard hit industries may struggle to build back at all after the phenomenon of the global pandemic, but overall there are positive signs that large businesses are poised to rebuild. Those resolute in their determination to build back better and more resilient on all levels will do well to start their process by gearing up the credit team for the challenges ahead.
A study by EY-Parthenon shows that there has been an 83% drop in the number of profit warnings issued in the first quarter of 2021, compared with the same time last year – the biggest percentage fall on record. Of course, there was a surge in the number of companies issuing profit warnings at the onset of the pandemic, but for the number to drop to 51 shows, I would speculate, either naivety or rosy optimism. As government support tapers and demand for products and services increases, credit managers will be under pressure to materialise working capital to support business operations as they ramp up.
Credit Teams need to Optimise more than they need Optimism
Instead of assuming that cash will flow as orders come in, there is merit in taking the time now to ask some searching questions about the health and efficiency of Accounts Receivable. Is it organised? Is it efficient? Is all the data for all the customers in one place and easy to slice, dice, and analyse? If there is any doubt over the number of invoices your business issues per month or the accuracy of your calculation of Days Sales Outstanding, then there is room to optimise. And now is the time.
Back office functions as the underpinning to business success
HR and Finance are typically seen as supporting functions, but I’d like to suggest that they are more than supportive; they are foundational. Finance, in particular, touches every area of the business and while there is no disaster if the very best deal is not struck on procurement, the implications of Accounts Receivable not functioning well are more severe. No cash in, no cash to spend. It’s that simple. And just as your own Accounts Payable team may be finely balancing the need for timely payment of invoices with the need to delay payment as far as possible (bearing in mind that large businesses are obliged to adhere to the prompt payment code), the same situation is going on in the AP departments of your customers. In all conscience, AR teams need to ask themselves if they are doing everything possible to ensure timely payment of invoices, minimal value in dispute and good ongoing assessment of credit risk.
Three things you can do to make a difference to the availability of working capital
The first is to invest in software commensurate with the scale of your organisation and centralise all your invoicing and collections operations so that best practice can be established and effectively reinforced across all invoices. Centralised teams do not have to be centrally located. Still, they need to be unified by processes and workflow tools that make it easy to prioritise tasks and work methodically through the processes of responding to invoice queries, placing reminder calls or communications and enforcing dunning processes. You can always be armed with the facts and calm about the risks and challenges you face if you have all invoice information in one system, not scattered across a host of ERP and accounting packages that require you and your teams to painstakingly tackle a data jigsaw puzzle in order to report reliably on the metrics that matter. If some customers have invoices sent by EDI, and your processes for managing those customers are different, then this could be a blind spot for you.
The second is to prioritise reminders by invoice value or credit risk. This is easy to do if all your data is on one system. In Corrivo, you can create reports and sort data by any field. Hence, credit managers often look globally at the value at risk and reassign the priority invoice reminders to their most effective ‘relationship builder’ collections managers.
The third is to consider offering extended payment terms to customers. This may seem counterintuitive, as the longer clients have to pay, the longer it takes you to make that cash available in your business. DSO goes in the wrong direction. However, our Invoice Finance product lets you get paid on time while giving your customers longer to pay. In some industries, this extra time is essential to maintaining customer loyalty. Without having an option of this nature, your customers may be at risk of defecting to a competitor with a convenient option available to them at an affordable price.
To find out more about Corrivo or our Invoice Finance product, please give me a call or send me an email. It would be my pleasure to give you a five-minute demonstration of the product so you can see for yourself how easy your life could be with an enterprise-grade platform making all your Accounts Receivable data easier to manage.