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.

Better Receivables Management – a Proactive Approach

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
• Collections

There are many good articles on how to improve Accounts Receivable Management.  Since the squeaky wheel gets attention they often recommend:

1. Create and enforce credit policies and credit limits up front
2. Get invoices out quickly and accurately – by email, not snail mail
3. Make sure deliveries are correct and resolve disputes quickly
4. Call customers promptly when payment is late
5. 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 tomadkins@b2bcfo.com.

To learn more or request a demo, go to www.termsync.com and enter B2BCFO-TA in the comments.

(* When it comes to cash flow, there’s no time for a Top 10 list!)

Why do you need to concentrate on Cash Flow? Simply put, especially for a small to mid-sized business, cash flow equals life, growth, prosperity . . . and survival.

You need to free yourself to focus your unique talents and abilities on growing your business rather than fighting the constant cash flow fires. Remember . . . you are the only one who really cares about the ongoing viability of your company. It’s your future that you are most concerned about because, if your company is not successful, none of your employees will have a job.

Here are the Top 5 Cash Flow Rules you can implement immediately that will transform the way you manage your business from this point forward. But first, remember the two cardinal rules of managing a business:

• Never run out of cash. Make the commitment to do what it takes so that it does not happen to you.

• Cash Is King. Cash is what keeps your business alive. Manage it with the attention it deserves. Without cash, you have no business.

Now, the Top 5 Rules . . .

1. Know the cash balance right now. Even the most intelligent and experienced person will fail if they are making business decisions using inaccurate or incomplete cash balances.

2. Do today’s work today. The key to keeping an accurate cash balance in your accounting system is to do today’s work today. When you do this, you will have the numbers you need—when you need them.

3. Either you do the work or have someone else do it. Either you do the work or have someone else do it—those are the only two choices you have. The work must be done. So, either you do it or have someone else do it. (See Rule 3a.)

3a. If you are doing the work of determining the cash balance, you may not have the right people working for you. Unless you are a start-up business without any accounting staff, you must be sure that the financial people know that you need and demand that they focus their efforts on monitoring the cash balance, and keep you aware of what’s happening with your cash.

4. You absolutely, positively must have cash flow projections. Cash flow projections are the key to making wise and profitable business decisions. It’s impossible to run your business properly without them.

5. Eliminate your cash flow worries so you are free to do what you do best—take care of customers and make more money. This is the real key to your success in business. The reason you have to make sure you have the cash flow of your business under control is so you are free to focus all your time and talents where you can make the most difference in your business.

B2B CFO® specializes in helping business owners manage their cash flow. Give us a call for a free Discovery Analysis™ of your business. It’s a call worth making.