A sensitive geopolitical environment, a stagnated economy, the big European housing crisis, sky-high food inflation, and a state of emotional unrest on a global level – while the world might not have officially entered a state of recession yet, the signs are loud & clear. An economic downturn is a recipe for disaster while businesses are still reeling under the long-tail aftereffects of the global pandemic.
Maintaining a healthy and positive cash flow has been a significant challenge for organizations for the longest time. However, the volatile nature of the current business landscape makes it all the more important for companies to ensure that they are paid, and on time.
Read on to understand why accounts receivable management is essential in times of recession, and then look at some tips that can help you navigate this challenge and maintain a healthy cash flow.
Even in a buoyant economy, cash flow is one of the most important metrics to determine the financial health of any organization. A high Days Sales Outstanding (DSO) is one of the earliest warning signs indicating an organizational inability to collect timely customer payments. Add to the mix a global pandemic and an economic meltdown, and things automatically get pretty complex.
According to a recent Chaser report, 87% of companies experienced late customer payments in 2022. And if the learnings of 2007-2009’s Great Recessions are to go by, businesses are often left with no option but to scramble to get paid.
Finance leaders, especially in small and mid-sized businesses, will have to take proactive steps to prioritize accounts receivable and build solid workflows that streamline collections and help their organizations ride out the storm.
While this is a critical prerequisite to any business transaction, you would be surprised to know how many companies extend credit lines with little or no documentation. While such decisions can go a long way in nurturing relationships, they can also prove catastrophic in times of recession. Drafting comprehensive credit policies not only safeguards the company’s accounts receivable but also acts as a legal proof of the debt. Once outlined, finance leaders must ensure that these policies are implemented for all customers without exceptions.
RELATED BLOG: Want to know more about drafting & implementing effective credit policies for your business? Check out our ultimate guide now!
One of the biggest factors that can affect the timeliness of business payments is the expectation of receiving entire debt in one go – something that organizations will have to reconsider in the current economic scenario. Offering customers the option of breaking down payments into smaller installments can ensure a steady inflow of cash and contribute to building stronger business relationships. AR teams must clearly define and communicate the installment amounts, due dates, and payment methods. Integrating flexibility into such installment plans can further reduce the chances of delayed payments and bad debts.
Even under normal circumstances, effective and timely communication is critical to the accounts receivable process. Sending firm yet professional reminders regularly drives customers to complete payments faster. In the case of an economic crisis, however, AR teams need to adopt a more personal, empathetic communication style with their customers. In addition to regular follow-up mails, collection experts must make friendly payment check-in calls to ensure timely payments. Remember, things will be tough for many people – be understanding, be polite and use the opportunity to build goodwill amongst your customers.
Many businesses tend to perform credit checks for new customers at the outset of the relationship and then forget about it altogether. In times of an economic meltdown, this can prove to be disastrous. Before extending a fresh credit line to existing customers, AR teams must perform thorough credit checks and adjust credit limits as needed. Not only does this protect companies from piling bad debts, but it also facilitates informed decision-making about credit limits.
Despite its critical nature, there is no denying that accounts receivable is a complex web of inter-connected processes that can hamper efficiency, cause staff burnouts and take the focus away from core activities. Let’s face it; no finance leader would want to allocate valuable resources to collections in the middle of a recession.
Embracing the use of technology can help automate critical AR tasks like sending out timely payment reminders, keeping a real-time track of receivables, and initiating escalation measures where required. Moreover, working with collection tools also reduces operational costs significantly – something that will benefit companies of all sizes & types in the current scenario.
Despite all your proactive measures, the harsh reality remains that some industries are bound to get affected by the recession more than others, and there will be instances where you are not paid. To prepare for such scenarios, it becomes imperative for AR teams to have a well-defined late payment structure and act on it. Make it a point to communicate late payment terms while extending credit clearly, and proactively inform customers about the same in payment reminders to increase the likelihood of getting paid.
Often, unhealthy cash flow situations directly result from a business’s inability to track the efficiency of collection teams. Accounts receivable KPIs like Days Sales Outstanding (DSO), Average Days Delinquent (ADD), and Collective Effectiveness Index (CEI) can help measure TAT for payments and identify problem areas. Monitoring these KPIs can go a long way in tracking the success rate of your collection efforts and allows you to make any process changes before things go out of hand.
Owing to the laborious and time-consuming nature of the accounts receivable process, in-house teams might often find it challenging to manage collections and maintain a healthy cash flow. Partnering with a third-party expert like QX allows businesses to work with a highly skilled team of collection experts, implement AR best practices and leverage the latest collection technology to reduce the cost of operations.
At QX, we have offered highly effective accounts receivable management services to businesses across industries and geographies for almost two decades. We also use analytics to provide custom data & insights, ensuring that our clients are always on top of their collections. Schedule a free, no-obligation call with our experts to kickstart your accounts receivable transformation journey.
Originally published Jan 20, 2023 11:01:00, updated Jan 20 2023