Unleashing Value from Accounts Receivable

Ideas to optimize profitability and improve working capital

INCREASING CASH FLOW

In today’s economy getting paid on time is a crucial factor in sustaining sufficient cash flow for continued business operations and profitability.

Customers making payments for services and products influence cash flow in a couple of important ways: speed and volume of payments.

Increasing the speed of customer payments means cash is returned to the business faster.  It also improves the level of working capital, reducing investment-funding requirements for future growth.

Improving the volume of payments simply ensures more customers pay for products and services.  It reduces bad debt write offs, operational expense associated with the collections process, improving profitability and therefore shareholder return.

IMPROVING ACCOUNTS RECEIVABLE

Each of these factors is reflected in the performance of the Accounts Receivable (AR) process. 

In many organizations the AR process presents opportunity to realize substantial value.

Typically measured using averaged indicators such as Days Sales Outstanding (DSO) and % Write offs this process is often not considered a priority for investment until there is a serious deterioration in financial performance. 

Unfortunately once deterioration has occurred, recovery tends to be lengthy and, as a result, expensive. 

However looking closely at the detail behind these measures can, not only reveal problems early on, but also provide opportunity to generate added value.

RESULTS COMPARISON vs. INDUSTRY PEERS

A comparison of performance in key metrics across an industry group is often helpful in diagnosing this opportunity.

DSO comparison vs peers

This approach normalizes for many structural differences.  Significant variation of performance can be interpreted as potential process differences worth further investigation.

See also  Symptomatic Performance Diagnosis

Opportunities typically exist with accounts receivable levels at 10% of assets and DSO figures in excess of 35 days.  

Getting paid sooner, even by of a couple of days, can yield significant additional free cash and reduce funding expense, as well as reducing bad debt.

KEY DRIVERS TO CONSIDER

Initiatives to improve the AR process can be undertaken in a few areas.

  • Business & system process
  • Risk Operations treatment strategy
  • Operational Performance

These initiatives are usually aspects of one of five key AR control processes.

  1. Building effective portfolio and financial controls
  2. Controlling delinquency setup criteria
  3. Creating incentives for payment and contacting customers early in the cycle to avoid balance build-up
  4. Establishing true non-pay customers quickly, to restrict further product utility
  5. Ensuring effective collections processes to maximize customer retention and minimize financial loss

Controlling each of these elements enables faster payment, reduced bad debt loss and improved AR performance.

CUSTOMER EXPERIENCE IS CRITICAL

Whilst there is an obvious need to improve financial measures, the element of customer treatment is also critical.  It needs to be considered and finely balanced against all the other factors in the process. 

For example;

Losses can be reduced to very low levels, by running overly tight controls.  This can often occur when responding to significant results deterioration; it can create huge customer dissatisfaction, impacting brand reputation and future business revenue.

Conversely, relaxing AR controls is often considered as a method to quickly reduce customer complaints and grow the customer base.  Without controls this approach can build and compound the exposure for future financial loss.

The actual key to the success of a program is ensuring a balance between each element.

Implement the right treatment for the right customers, at the right time, in a sensitive manner

FINDING BALANCE

See also  UK Energy Supply Market Challenges

The ultimate the goal of a robust AR process is to find the optimal balance between each of the following elements

  • Revenue (Customer Satisfaction)
  • Operating Expense
  • Speed of payment and Bad Debt. 

In today’s business environment time, investment funds, resources and expertise are all in limited supply.  Implementing complex process change can be a challenge.

However, a structured approach and expert resources can dramatically shorten process improvement timeframes and achieve a significant uplift in financial performance.

CONCLUSION

Understanding and investing in the Account Receivable process is an important element for maintaining business health.

Implementing a robust AR process and control infrastructure is an enabler for increased working capital, reduced bad debt and a sensitive customer process.

Unleashing value from the Accounts Receivable process is an opportunity to yield significant financial benefits.


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