Maximise cash flow with accounts receivable
Maximising cash flow with accounts receivable
Amongst the levers that businesses could pull to improve their cash flow, accounts receivable are often the most challenging. Because most companies have little control over their customers' payment behaviour. However, with accounts receivable being the biggest asset on a company's balance sheet, and businesses needing to bolster cash inflows as much as possible to weather the storm of COVID-19, optimising collections and limiting bad debt losses become paramount.
These seven accounts receivable best practices in turbulent times below could aid businesses in building financial resilience.
1. Use analytics to categorise customers.
Different collections strategies can then be designed to fit the different customer categories. A basic three-tier system may comprise:
- "Good" customers.
They are in a strong financial position and pose almost no credit risk. COVID-19 has minimal or no effects on their sectors or payment behaviour.
- "Fair" customers.
They are in a relatively good financial position and pose low credit risk. COVID-19 could affect their sectors negatively, both directly and indirectly. Therefore, their payment behaviour could be adversely influenced during and shortly after the outbreak.
- "Poor" customers.
They are in a weak financial position and pose considerable credit risk. COVID-19 affects their sectors directly and severely. The pandemic threatens their solvency further and can cause them to default on payments in the near future.
2. Customers in temporary financial distress
If customers are in temporary financial distress (i.e. "Fair" customers), consider providing them with short-term relief in exchange for prompt payments. An example is suspending interest and late fees. If it is possible, also consider giving them incentives to encourage early payments. Sometimes small discounts are enough to speed up the collections of such accounts during economic hardship. 3. Customers with cashflow problems
If customers have cash flow problems and cannot pay in full (i.e. "Poor" customers), consider working out a payment plan with them and accepting what can be collected today. This is better than having to write the accounts receivable off later in the event that COVID-19 worsens the economic downturn. 4. In general, be willing to renegotiate payment terms with customers.
Renegotiating gives companies more chance of collections, as long as the renegotiated terms align with their credit policy. The key is being diplomatic while being insistent on settlement terms.
5. Offer easier payment methods
Offer payment methods that are easy for customers to pay and make the payment process as frictionless as possible, taking into account that the customers may lack staff dedicated to accounts payable or the staff may work remotely.
6. Ensure the accuracy of customer master data.
Any changes in customers' credit profiles, any standard and customised terms applied, and any collections efforts and agreements should be duly recorded. This makes certain that invoices are sent without errors, collections are executed with the right approach, and disputes are handled in the right manner.
7. Adjust collections operations to the availability of the workforce.
Depending on each company's circumstances, their collections staff may only conduct part of their collections activities or have to suspend them all. To prevent COVID-19 from hampering collections efforts, consider establishing strategic partnerships with a collections agency. Improved cash flow brings financial flexibility, which in turn increases companies' resilience during downturns (5). It is imperative to regularly optimise balance sheet and tailor collections strategies and approaches to the insights obtained from financial risk assessments and stress tests.