Finance Facts: Generating Cash Inflows

Let’s Talk About Tightening your Customer Payment Collection Process

A few days ago I posted an article on the effects of the pandemic on the CFO function (shameless plug, see link here: https://www.dhirubhai.net/pulse/pandemic-possible-rise-cfo-function-sonja-rossteuscher/ ), where I mentioned the extreme focus on CASH and cashflow that has been necessary across a huge number of organizations through the crisis. As written in that article, there are many ways an organization can generate cash. But before we look at external sources that cost money (and a whole lot of effort), we need to look inwards at what can be done WITHIN the business itself to free up cash needs.

Taking this into account, let’s take a moment to talk about what the crisis has taught us about the power of applying BEST IN CLASS customer payment collection, especially at a time when cash resources are particularly scarce. 

But before I do, some important points to consider in general on the topic:

-       Pretty much all companies have OVERDUES from customers, most of which are not legitimate… and linked at least partially to poor or insufficient process and follow-up. Consider this: if you have 10% overdue receivables, and an average receivables balance of 100 MEUR – that means you are financing your customers FOR FREE with 10 MEUR of YOUR hard-earned cash! Or in other words, you might need 10 MEUR more debt – at least short-term - to cover these delinquent customer payments. Even at 3% annual interest, on a rolling basis that is 300.000 EUR a YEAR in foregone earnings before tax!

-       Most companies, particularly those with limited supplier power (think Porters 5 forces here), have longer payment terms from customers than from suppliers. If you pay your suppliers on average in 45 days, and your customers pay you on average in 60 days, those 15 days delta mean a hard cash financing need that costs you money as a business to get from banks or equity owners.

-       Many companies are quick to raise invoices, but slow or undisciplined in follow up; or approach follow-ups in irregular or unstandardized ways.

-       And finally, too many companies (particularly start-ups and small enterprises) don’t think enough about the impact of customer and supplier payment terms out the door and what it means for their overall cash needs

Based on this context, what did we do in my organization when the crisis hit last March?

-       We started by tracking customer inflows against plan for the first time ever globally on a DAILY BASIS… because we were terrified our customers would stop paying when the world seemed to grind to a halt in the first lock down. Of course, we needed an early warning if this was going to happen. (The good news was, they never did stop paying…)

-       This systematic follow-up allowed us to have visibility DAILY on development in overdues, and recognize analytically where our weak spots were. These were followed up immediately, in the early days with the full attention of the SVP sales and CFO.

-       Over the next months, these follow-ups crystallized clearly our best in class performing countries in terms of customer payment management. These countries followed up EVERY SINGLE INVOICE starting one week after the goods left the factory. That meant, that there was no excuse for our customers not to pay by the time due date came around (on average, 60 days later)… The important point here is that they didn’t just realize there was a problem on day 61 when the money hadn’t hit the bank account.

-       We pushed our weaker countries to follow suit. Following up centrally on a weekly basis, and encouraging a close interaction with our “role models”

The result?

We have so far cut our average customer overdues IN HALF from 10% to 5% on a recurring basis in less than 6 months and amidst chaotic conditions, freeing up 4 Million EURO in CASH based on our latest figures. We are still far from perfect, but a whole lot better because of the crisis, and very happy to have the additional headroom going into a second pandemic year!

So, what should you take away from here?

-       Unless you are in the banking business, STOP indirectly financing your customers for FREE by accepting payment in arrears!

-       Do not underestimate the power of strong internal process on overdues improvement – and what that means for the cash you can free up for your business

-       Be proactive in following up each and every invoice raised to your customers. Standardize the follow-ups. Automate them wherever possible. Do it often and consistently. 

-       Work closely with sales to ensure optimization of payment terms are considered from the outset. Renegotiate where possible (but know that this is always harder)! 

-       All of this requires excellent cross functional collaboration in any organization, particularly between finance and sales.  

Have any tips to share on other ways to tighten your customer payments collection process? I would love to hear from you!