Checklist for Accounts Receivable professionals during a crisis

In the current economic climate, the importance of the role played by AR teams in managing cashflow (by collecting outstanding sales) cannot be underestimated.

This is especially true right now, as it can be harder than ever for businesses to secure timely payment on outstanding debt.

Faced with cashflow pressures, your customers might be considering tactical payment delays.  What should AR teams be doing to minimise late inbound payments?

Willingness to pay

Expectedly, many companies have seen a decline in their customers’ willingness to pay.

This is not necessarily related to their actual ability to pay. Pre-COVID-19 industry research showed that 89% of companies deliberately delay supplier payments in order to protect their own cashflow.

This is not exclusively a ‘big business’ tactic as a quarter of SMBs admit to paying late – up from 19% in 2019. But just think what this figure could be in a post-COVID-19 era?

Take care of the basics

Faced with cashflow pressures, even more of your customers might be considering tactical payment delays.

Make sure that you are getting the basics right; that invoices are correctly addressed, purchase order numbers are quoted where needed, and statements and reminders are sent to the right person at the right time. Above all, chase all invoices as soon as they become overdue.

But what else should AR teams be thinking about in order to minimise the amount or frequency of late inbound payments? The following strategies are all designed to make it easier to get paid on time and in full.

Train your staff

The first line of defence against bad payers are the people that make up your AR team, as they will actually be speaking to and interacting with your customers. They might be working from home with limited access to printers or other materials required to do their job - so double check they are fully equipped.

Consider refresher training on existing best practice AR policies or work with them to introduce any new payment initiatives. Ensure everyone is aware of any updated responsibilities or revised payment initiatives.

Part of this should include how enforcement of the various legal options should be applied. You might do more damage than good if you immediately shout ‘Statutory Interest’ as soon as an invoice becomes overdue, no matter how tempting this might be. But if an invoice remains unpaid after a set number of days, it be might be necessary to up the ante.

Review your contracts

A good starting point for tightening up how you manage your cashflow is to review your contracts, Terms & Conditions, and lines of credit on offer. These need to be watertight and explicit when it comes to what action could be taken if payments fall outside of the agreed credit terms.

This shouldn’t take too long to do, and some sensible steps to consider include reducing your credit terms or documenting timelines for levying punitive fees. However, incentives such as early settlement discounts might be more effective and could lead to a strengthening of your customer relationship.

One caveat here - if you allow customers to apply automatic discounts based on how early they settle an invoice, then be sure to check that any claimed discounts are correct and immediately chase down discounts that your debtors were not entitled to.

Choose who you want to do business with

In most cases, a business will probably sell to anyone and everyone that is interested in buying from them. However, now might be a good time to be smarter about who you choose to do business with.

Use credit checks to detect potential new customers with a poor credit history. It doesn’t mean that you shouldn’t sell to them, but you might want to think about what credit terms, if any, are offered.

Given that COVID-19 could change the business landscape forever, it is worth looking at other entities within your supply chain, such as partners and suppliers. This analysis is becoming easier thanks to the increased visibility of financial information that is available with Open Banking.

Look for potential issues before they occur

Look ahead to identify any potential issues before they impact you. Are there any trends with specific or high-value customers around deterioration in payment performance? This could be an indicator of a deliberate change in payment strategy.

If you are facing financial challenges, one option might be to look at supply chain financing initiatives. This could include collaboration with key trading partners to increase the flow of cash across your extended supply chain, or factoring out some invoices to help with short term cashflow.

Payment on delivery

There is nothing worse than booking an order only to find out that the customer has backed out at the last minute, or the customer ends up delaying payment until the agreed credit terms have been exceeded. This impacts your cashflow and liquidity, not theirs.

To reduce this risk, consider options such as prepayment or moving to payment on delivery. If you can offer instant card payments either through your website, mobile device, or payment terminal, this could eliminate a large element of future payment risk.

If this is not possible then ask for a deposit before delivery. This can go a long way to deterring potential timewasters. Where you are entering a long-term agreement with a customer, consider taking out trade references as part of your risk screening diligence.

Cryptocurrency for the adventurous

For the adventurous small business, cryptocurrency transactions for business to business payments might point towards what the future might look like. AR teams would gain greater visibility over inbound payments whilst obtaining a secure record of the transaction.

Whilst AR teams may be reluctant to adopt cryptocurrency as a payment channel today, it may eventually prove to be a viable and useful alternative.

Conclusion

Without the work of skilled and diligent AR professionals, businesses won’t be able to collect and process the cash needed to make payroll and continue operations.

There are many steps that you can take if you act early enough, that can minimise the risk of bad debt or late payments.

It might be worth sitting down and reviewing opportunities to improve your AR policies and processes to prevent or at the very least minimise future cashflow issues.