Managing Working Capital - The devil is in the receivables!

CASH FLOWS : THE FINANCE LEADER'S TREADMILL!

A continuous WIP

Cash Flow is the lifeblood of any business – small or large. It’s the constant tug-of-war between Monies-in (Assets) and Monies out (Liabilities) that keeps ?nance professionals working round the clock. The constant endeavour, especially that of a ?nance leader, is to make sure that in this war to ‘win’ over liabilities, they are equipped with enough and more current assets. And Accounts Receivable (AR) – payments that ?rms expect against the invoices that they raise - form a major chunk of those assets.

WHY ALL THE FUSS ABOUT COLLECTIONS? 

Businesses Can Potentially Save 1-3% Of The Top Line! 

This is nothing new and all ?nance leaders know about it. It’s only a matter of fact that they and their teams have been contending with AR or collections and the challenges that lie in the process, since the time commerce began (of course such designations didn’t exist back then!). What is also known is that it is easier said than done. Firms need to spend a lot of time, energy and actual money to receive what their customers owe them. From the customers (clients, dealers, corporates etc) who are very prompt in payments, to the ones who have shifting intents to pay and to a majority who need a lot of follow-ups and delay payments because of process de?ciencies - Accounts Receivable is a constant WIP and needs constant improvement. And this is true for all industries viz Distribution, Manufacturing or Services or business models like B2B, B2C or B2B2C etc. It’s true whether you take advances do credit sales, whether it’s a single invoice you raise or if you raise milestone-based invoices.  

WHAT’S WRONG WITH WHAT’S ALREADY BEING DONE? 

A continuous WIP

As we established above, a major flaw in the usual methods of collection is the fact that most of the processes in the Invoice to Cash (i-2-c) cycle are either (a) manual or (b) inefficient or both. To add to these challenges is the fact that (c) not a lot of insights can be gathered to ensure that optimal AR decisions can be taken (customer default risk, for instance). 

According to a PWC Working Capital Study 2018, about 1.1 Tn dollars are stuck in unpaid invoices.

Euler Hermes 2018 Economic Insights Report further adds that 1 in 4 companies across the globe receives delayed payments! 

Still, why does collections need to be re-looked into? There are CRMs and ERPs and accounting solutions that are supposed to automate and help out all ?rms. To top it, ?rms have standard processes and people to cater to them. 

Traditionally most companies use the existing CRM, ERP or Accounting Solutions to cater to their collections process also. While these solutions can work in their areas of core competence, they can’t really help with these challenges – unless a heavy and costly customisation is carried out. The result? 

• High Daily Sales Outstanding or DSOs. This translates into a high risk of write-o?s or delinquencies. 
• Low e?ciency of Sales and Finance teams. Managing AR is an involved process that needs close coordination between all key stakeholders – the ?nance team, the sales team and the customers. And of course the requisite management teams. And the teams deviate from their core KPIs to many activities that don’t add any value.   
• Lack of Visibility and Insights. Making the most of invoicing and payment data – combined with other data sources is critical to manage risk and take better AR policy decisions. This is usually lacking in the existing processes and solutions. 
• Lack of a mechanism to anticipate and handle disputes. Handling disputes usually tends to be an afterthought in Collections with no systematic way to redress them built into the system.
• A One size-fits all approach to handle all customers. Each customer is unique. And this approach builds failure right into the system, by force-fitting the same solutions for everyone, without taking into account their unique financial situation.

Any measure to address the above challenges would need to work both in the given context of the business, i.e, with the existing ERPs/solutions etc and also be able to add value to the existing investments while being future-looking, i.e. evolve with the growth of the company. 

THEN AGAIN WHY CHANGE? YOU ALREADY KNOW THIS. 

Financial Consequences Of Status Quo!

But why should this be in the radar of a ?nance leader? Many of these concerns are known widely and seen in most products and services of suppliers. And the existing product pricing or terms of service are already factored-in, in the perceived costs involved in collections. 

This is exactly the blind spot that a ?nance leader needs to take care of. What re?ects in the above challenges – ?nally results in the Annual Report entries like “Doubtful Receivables” or “Receivables beyond 6 months” or even teams always being ‘busy’ in collections or coordinating with Sales teams. 

More importantly, let’s also look at what it costs to collect. According to various studies, there are both apparent costs and invisible costs that are involved in the process of collections. And they impact the bottom lines directly. 

These quanti?able and apparent costs when combined with the intangible and oftentimes hidden costs, take away as much as 1%-3% of the top line. But these costs, to their full extent, don’t ?gure in the price structures that are given to customers. And THIS is the cost of the blind spot – and the decision that needs to be taken.

You pay to collect. But how much you are willing to pay - is something that you need to work on. 

THE SOLUTION?

Ending The Quandary!

The ?rst step is to realize that as with other things in life, AR as a process is always in need of improvement. Or at least being open to fact that it might need tweaking if not an overhaul. That’s the battle half won already. The second is to evaluate solutions that (a) can help you resolve the challenges as well as (b) innovatively grow with the growth of your ?rm within the complexities of your business environment. 

 These solutions need not disrupt – but should surely complement the e?orts and the investments that you have made in your ERP/CRM solutions. They should also be able to leverage emerging technologies – Cloud, Predictive Analytics, Block Chain, Robotic Process Automation etc – that are sure to impact not just the work ?ows of AR but the entire Financial Supply Chain itself. 

Any solution that seamlessly straddles technology as well as the people and processes involved, is sure to give you the ROI that you need, to start as well as to sustain. 

THE NEED FOR INNOVATIVE ACCOUNTS RECEIVABLE SOLUTIONS 

A continuous WIP

And this is exactly where solutions meant specifically for Collections, come to the aid of enterprises – both large and small, making their Accounts Receivable - faster, easier, predictable and insight-driven.

They don't just enhance Cash Flows and Working Capital of businesses by signi?cantly improving the speed and e?ciency of collections, but can also integrate with core banking platforms and leading ERPs, helping automate many Accounts Receivable work?ows and providing invaluable AR insights using AI and Machine Learning. 

It is high time that companies start giving AR the 'new love' that it needs.

Other financial services such as Trade Receivable Insurance, Smart Payment Gateways, Access to third-party information like Bureau data, can transform the AR space in a business into a mature and robust business function.

And among other things, help Finance Leaders get off that treadmill once in a while!