One of my partners at B2B CFO®, David Kirkup, recently posted an excellent article on his blog. David provides CFO services in the Atlanta area. I have re-posted his article here, with a link to his blog as well.
March 9, 2012 David Kirkup
One of the biggest barriers to implementing regular cash flow forecasting is the unpredictability of incoming receipts. Accounts receivable is among the largest and most liquid assets on the books of most companies. A properly managed accounts receivable portfolio can expedite cash flow and support corporate cash requirements. The ultimate goal of accounts receivable is to increase working capital and reduce debt leverage.
So why do most companies entrust this key function to the lowly accounts receivable person? And worse, why do they then ask the likely introverted AR clerk to be aggressive about making difficult collection calls? Because, in many companies accounts receivable management is reactionary, time consuming and often neglected. Consider that most customers are contractually bound to pay their invoices in 30 days. Would it surprise you to know that nationally the statistics for receivables payment show that less than 50- 60% are paid within terms? Of course, by the time most companies are aware that a payment is late it’s already at 40 days and counting.
So what can be done to improve collections, reduce write-offs and improve cash flow? The four basic processes that make up the accounts receivable function are typically:
- Invoice Processing
- Payment processing
- Credit management
There are many good articles on how to improve Accounts Receivable Management. Since the squeaky wheel gets attention they often recommend:
- Create and enforce credit policies and credit limits up front
- Get invoices out quickly and accurately – by email, not snail mail
- Make sure deliveries are correct and resolve disputes quickly
- Call customers promptly when payment is late
- Monitor Days Sales outstanding and Receivables Aging closely.
All good ideas and long tried by good Chief Financial Officers. Unfortunately, there is one major flaw. You can’t call all 50, 100 or 500 customers on Day 30 to ask if they are going to pay – even if you could staff for that, it would annoy the customers. Thus, you cannot spring into action until you can identify the late payers – and by then you are approaching 40 days before you begin collection efforts.
So what if you could quickly identify and deal with late payers, and focus less effort on collection and more on customer service?
I think I have a solution. The problem with traditional receivables management processes is that they work on the Opt-In principle. This means that all the power lies in the customer side of the relationship, and until the customer is late, you remain ignorant of their intent and thus predictability of your cash flow is impaired. This is just the way things work…or is it?
Receivables management software firm TermSync is pioneering a new approach to pro-active receivables management to help our clients improve cash flow. TermSync works with vendors to capture invoice information, and then sends simple email reminders to the customers upon due date. The unique idea is that the emailed invoice gives the vendor three options or check buttons: Pay Invoice, Dispute Invoice, and Delay Payment.
In addition, TermSync has found that their “third party status” has helped them to put many problem customers onto a back-up ACH payment mode. What this now means is that the vendor/customer relationship has subtly changed. Now the vendor can receive advanced notice of the customer’s payment intentions, and can direct resources appropriately and quickly to resolve disputes and accommodate short payment delays. But the mere act of asking the customer to take 30 seconds to confirm intent and give a short reason for delays or disputes seems to make a huge difference. TermSync reports collection rates of 97% within terms for their customer base. Other unique features of this system include management of payment plans, dashboard summaries of AR stats, and the intelligent use of the network effect to ensure their vendors get to the top of the customer’s “must do” list.
Receivables management has always been the neglected stepchild of financial management, and it’s long overdue time for a rethink.
To discuss how we can start accelerating your cash flow, contact me at firstname.lastname@example.org.
To learn more or request a demo, go to www.termsync.com and enter B2BCFO-TA in the comments.