The current business outlook is fraught with uncertainties that are causing sleepless nights for many CFOs. Recession worries, high-interest rates, and the struggle to maintain a stable, engaged workforce while controlling labor costs are just a few of the pain points noted by analysts in early Q1. And now we have banking instability as an added concern.
While you can’t do anything about the macroeconomic climate, there is one source of financial risk you can address right now. It’s as simple as taking a strategic look at your accounts receivable. Here are 5 proven ways to strengthen cash flow.
1. Analyze Accounts Receivable Data to Identify Hot Spots
Most companies use a specific set of KPIs to monitor receivables. These might include days sales outstanding (DSO), average days delinquent (ADD), and turnover ratio, which shows how quickly you’re collecting revenue. The collection effectiveness index (CEI), or the percentage of accounts you collect on, is also one to watch — with the goal of coming as close as possible to 100%.
With these results in front of you, it’s easier to see specific groups of customers who are struggling to pay on time. For example, construction materials suppliers might see hot spots among homebuilders who’ve been hurt by the 21% year-over-year drop in housing starts.
Delinquent accounts might be clustered in certain regions or municipalities where things are particularly tough.
Small to midsize providers of legal, creative, or other professional services might see a different picture, with their greatest AR headaches caused by a handful of clients who account for a large share of total revenues.
2. Rank and Prioritize Accounts for Targeted Attention
You now have a clear sense of the market sectors and clients that demand decisive action. But be sure your strategy takes into account the time-driven truth of collections:
- When an account reaches 90 days past due, you have a 70% chance of collecting.
- After 6 months, your odds drop to about 50%.
- At 12 months, your chances of getting paid plummet to 23%.
These facts reinforce the need to look beyond the oldest debt or the highest outstanding balances in setting your collections strategy. You will need a dual approach that reaches out to clients literally the day after their accounts fall past due while taking a progressively more serious approach for those at or beyond the 90-day benchmark.
3. Rethink the Core Objectives of Your Collections Efforts
No business, regardless of size, reputation, or resources, can resolve collection problems by blindly hammering away at them. In fact, top collections agents act as open-minded investigators who make it their mission to learn everything they can about what’s happening with individual customers (and customer groups).
Seeing collections as a two-way, human-centered endeavor can transform the way you manage past-due accounts.
At the heart of this approach is the goal of clearing payment issues up quickly to preserve profitable client relationships. When this fails, your goal shifts to negotiating a timely solution that benefits each party. Both scenarios call for you to pose questions, invite engagement and lead the search for solutions.
Seeing collections as a two-way, human-centered endeavor can transform the way you manage past-due accounts, whether you’re working with one or two problem clients or contacting thousands via digitally driven systems that integrate mail, phone, text, and social media. Giving people the means and motivation to work with you (instead of dodging, fighting, or ignoring you) can shift the entire picture.
4. Tune-Up Collections Workflow and Credit Procedures
This is the art of acting on what you and your AR team learn as you go. Which outreach methods and channels work best with different clients (or groups)? How can you improve the timing of past-due alerts or reduce billing statement errors that tend to delay payments? Have you made it easy for clients to remit through convenient platforms? Keeping an eye on KPIs month-over-month and discussing what you learn in talking with individual customers will point you toward improvements.
Your AR data may also reveal the need to change credit terms for certain segments of your client base or for individual clients. This can help limit the impact of clients who have already fallen behind and prove equally valuable in restricting credit offered to clients in sectors where your data point to higher default risks.
5. Ask Your A/R Team What They Need to Work More Effectively
The pressures that keep you up at night affect your AR staff, too. Find out what training, support, and systems upgrades they need to manage the demands of their work. Regular meetings that show your respect for their front-line experience in dealing with delinquent clients will create a positive environment and keep you informed of trends and issues they’re seeing.
Partnering with others in your organization, your AR team can work on credit, billing, and customer relations challenges that affect growth and retention. Stronger sales, timelier payments, and healthier cash flow can result – all great outcomes, especially in turbulent times.
Dean Kaplan is president of The Kaplan Group.