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Episode 20: How to Prepare Your CFOs Office For Inflation

Olivia Rosca Olivia Rosca

Subject Matter Expert

Order to Cash

Madhurima Gupta Madhurima Gupta

Senior Product Marketing Manager

HighRadius

Available on

Synopsis:

In this episode, join Olivia Rosca, Subject Matter Expert Senior Transformation Consultant as she discusses how CFO offices can prepare for inflation while keeping their cash flow and accounts receivables management in check.

Transcript:

Madhurima Gupta:
Welcome to the mid-market CFO circle podcast powered by hi radius. I’m your host mother Mata. We hear you. Mid-Market CFOs and we’ve got your back. Every Thursday. We bring you CFO circle podcast with your peers and we discuss the challenges you face and how you can leverage emerging technology to solve them today. We wanna talk about how CFOs can prepare their offices for inflation us inflation searched to a new four decade high of 8.5 in March from the same a month same month, a year ago, driven by stride operating energy and food cost, supply constraints and strong consumer demand. High inflation is the downside of booming growth as the economic bounces back from COVID 1970 1% of SMB owners said that inflation has had a negative impact on their businesses in the past three months already. So with that being said, business leaders today should now start thinking about what business impacts of heightened inflation might look like for them, but how can CFO steer through this high inflation? That’s exactly what we are gonna talk about today. And for that we have Olivia Roka on CFO circle podcast. Hi, Olivia, welcome to the show.

Olivia Rosca:
Hi Madhurima. Thank you for having me. I’m very happy to be here.

Madhurima Gupta:
The pleasure is all mine. And before we get started with our questions, I would like to go ahead and introduce Olivia for our listeners. Olivia Roka comes with 16 years of experience in order to cash process obtained in top multinational, SSCs, BPOs, and central finance organizations across multiple industries and geographies. She’s currently the global process owner for credit collections and dispute management. She has led end to end O to C transformation, journeys, driven tool, customizations, and deployments, and managed and supported operations team and advocated change across both local markets and central finance organizations. She has successfully managed to build strong multicultural teams delivered constant measurable results and create a vast network of business relationships. So on that particular elaborate and glorious introduction, Olivia, I want to understand how has your journey been so far? What were the highlights that you’d like to share with our listeners?

Olivia Rosca:
Thank you for, for that introduction. When you hear it from you know, externally, it, it sounds like I’ve been very busy which I guess it is true. Yes, over this past 16 years I’ve been I’ve been busy, both traveling in different organizations and landscapes and also expanding, let’s say my scope of work. So I’ve worked in BSSC, I’ve worked in a BPO, I’ve worked as a consultant. I’ve worked as a global process owner right now. Like you said, I think the challenges over time are similar they’re gravity increases or decreases with the outlier that in most recent years technology and sustainability are extremely important. So making sure that you have the right technology to push you forward and to give you the opportunity, not to lay off people, but to re-skill people. And I think if you look at the Nordics, a lot of companies, this is what they’re doing there. Reinvesting, if you’ve heard of the universal basic income, for example, they are, a lot of countries are testing it, not to allow people to not do anything, but to allow people to re-skill themselves, but you can’t re-skill people if you still need them and you still need them because you haven’t adopted the right technology. And because this trend is increasing, this technology also becomes more affordable mm-hmm so that’s a good thing. There are multiple companies on the market offering various solutions. A lot of companies are open to customization, which is important because businesses are very different in Europe, alone. You can see how much culture and you know, preferences, historical preferences and customer behavior impacts these tools and also sustainability. We keep talking about, we don’t have a second planet and that’s, that’s extremely true. So I think investing in these technologies and reskilling people to do more value added jobs. It’s, it’s what I’ve seen in recent years. And what I also want to focus on going forward, to be honest,

Madhurima Gupta:
Thanks for sharing what your journey has been like. And specifically highlighting that when companies are covering gaps in their processes with automation, they should look at it from the perspective of letting their workforce have time to reskill themselves and even retain them with that particular action in place of just looking at ways to you know, look at it from layoff standpoint now having discussed what your journey has been. What do you think, or how do you think inflation is going to impact businesses, especially the mid-market companies that are recovering from

Olivia Rosca:
Management, first of all I think it would be a presumption of presumptuous of us to think that COVID is over, so if you look I think today or yesterday, the CDC already placed two countries on the high risk, high COVID risk. One of them being the Dominican Republic, which is highly preferred by American tourists. So I don’t think COVID is over yet I do think and we’ll talk later about that, that we should revisit our approach to COVID, but going back to the impact on mid-market companies or small and medium enterprises, higher costs are obvious shipping rate increases present by actually talked about that, about how the nine big shipping companies have increased prices. And that, I don’t think that any presidential decree can curb a free market, right? So you will not be able to limit their asking prices. Let’s say raw materials are also the cost of raw materials is increasing and that’s because energy prices are increasing. I think right now we’re at over $6 a gallon. So, and supply chain disruptions will continue. The war in Ukraine is nowhere near over and China’s zero COVID policy, which is in my opinion, slightly unrealistic will also affect supply chain. So, and all of this will drive higher labor costs, right? People need money and higher cost of human capital. People need to buy the, the products, even if there’re only necessary. And you can see that right now in the us, there are two job openings for every unemployed person, right? So the job openings are double the, the number of unemployed well officially registered unemployed people. So add the higher interest rates. And I think it’s going to be a difficult time for small and medium enterprises or mid-market, but there’s one thing that I would like to put out there. And I think this is an interesting concept, private equity firms and how small and medium companies should collaborate with private equity firms right now, investors. And there are a lot of investors out there all funds and people that do have a, a sizable amount of money to invest right now very, until now very safe investments were government bonds public equities, however right now, because well the environment is unsure. I think a lot of these investors will look again at private markets. So why private equity firms, because apart from giving you the temporary capital that you need, they can also provide you with the advice on where to put that capital, where to invest it, right. How to acquire the proper technology to see you through this period, how to perhaps maybe streamline or reorganize your structures, right? Your employees. I think that’s an opportunity that small and medium enterprises or mid-market customers should look into. I’ve actually seen a survey where there is a huge increase in interest and the private equity market is estimating that they will have a, a huge year going forward. So I think that’s, that’s something that they should look into

Madhurima Gupta:
And like your rightly pointed out you know, pandemic is still there. It’s not gonna go away that soon. So, you know, with all that’s already there and inflation happening you know, it means that if we are talking about receivables only, or receivables first, any company’s receivables are decreasing in value at the same rate as if you were paying extra interest, making it essential to take connective measures what would you say, would these measures

Olivia Rosca:
Be what I’ve seen and what I I’ll tell you what I would advise and what I wouldn’t advise, I would not necessarily advise more, let’s say, aggressive collections, what I would advise and what I haven’t seen in a lot of companies is on time collections. So on time means that you need to focus on getting that money that you are owed when you are owed. Right. and that means making sure you focus on the actual bad payers, right? The it’s not worth focusing on your customers who will pay on the due date or customers who are not interested in paying in advance ever, but make sure you identify who systemically pays late. So on time collections focusing on historically proven bad payers also make sure you have a contact with that customer in advance of the invoice being due and what I meant by not aggressive. Don’t ask them before the invoice is due. If they’ll pay it, make sure however that you eliminate their excuses, make sure their invoice is received and they’ve confirmed it and make sure that it’s correct. Right? Because we still see a lot of companies where invoice accuracy is faulty extremely faulty. So, and that you have all the documentation because a lot of manufacturing companies also need to provide additional documentation together with the invoice, good receipt proof of service and so on. So make sure you have your, let’s say internal kitchen in order before you can ask the customer for money also the bad payers that I was talking about apart from timely, contacting them and a focus on them set up through your policy, alternative payment methods upfront payments. So advanced payments. It can be a part of the amount. It can be the full amount, depending on the gravity of the bad payer and also payment plans. Payment plans are a good, a good method and I’ve tested it in the past and it worked. So this is what I would recommend. What I wouldn’t recommend is aggressive collections with the wrong focus especially because customers tend to remember that. So you do want to maintain your customer base. Especially now, if you look at least in the UK and I think soon in the us as well I believe there will be regulations introduced around aggressive collections. So from, and this means from the time of contacting to, you know, the way you’re contact paying customers and the, the language that you’re allowed to use.

Madhurima Gupta:
Thanks for sharing that. Just a side question to that. How would aggressive collections strategy be different from a proactive collection strategy? How would you say that? What’s the difference again?

Olivia Rosca:
Yeah, I would say aggressive collections is contacting a customer that, you know, is good payer, right? Or that you don’t have information. It’s a new customer before the due date and asking for that payment. I think that would be perceived as aggressive. Another aggressive collection is sending official Dunning letters usually depending on the industry and so on, you have between three and five letters anything more, I think it’s aggressive and sending them within less than two weeks, I believe is also aggressive without any other sort of contact. And it depends on the scale of the customer, the what method you use and so on, but that’s what I would describe as aggressive collections.

Madhurima Gupta:
So, you know, continuing this discussion on accounts receivable. So let’s say on one side companies, CFO or C-suite members know that their accounts receivable is being hammered. And at the same time, their customers are also struggling to live up to their financial commitments. Now this becomes a very deadly combination. So what can businesses do to prevent bad debt trade offs, and how can CFOs office do this while also holding onto their relationships with the customers?

Olivia Rosca:
So I think I’ve touched upon some of these things a little earlier, but I’ll, I’ll reiterate it first of all issue your invoices correctly, and even more importantly, as soon as possible. And this is extremely important in the services business, right, where we know that it takes a long time to invoice services because you need to get the back of documentation of maybe a time and material a sheet, something like that, but think about it like this, the longer it takes you to invoice a customer the longer the period where that customer’s financial situation can change. So if I made a contract with you as a customer today to purchase something worth, I don’t know, 50,000 K at us dollars in three months my liquidity may be a little different and with the inflation and everything, I might not have that 50,000. Maybe my customers were not able to provide me those funds, maybe my AR didn’t come through as a payment. So make sure you invoice not only correctly, but as soon as possible so that you give the customer as little time as possible to have their financial situation changed. That’s one and another thing, what I touched upon earlier is ask for more front payments or advanced payments especially if you have historical bad payers. So, you know, that customer doesn’t ask for an advanced payment and it will also help you with the, your costs. If you get half of the amount of, let’s say an installation or something, then it will help you at least with the cost of the materials, right. That you need to, to purchase. So, and then make payment plans, think of it like this. You may not get the entire amount, but it’s still important if you get half of it, right? So you may you be ready to agree to a payment plan and maybe the customer will, will only respect three out of four installments or two out of four, but you’ll still get half the money it’s better than not getting anything at all. Right? So encourage payment plans, another thing which I think it’s maybe unusual try and send your customers or your customer base surveys about how they are perceiving this period and how this inflation and this situation is impacting their business. You’ll get an idea of how bad things are for them. And it will give you a chance to plan ahead if you and not just your actual customers, right, but what your tar, your target customers are. It will give you an idea of how you need to plan how your customers see the situation. So I think that’s also a future view that you could use. And another thing is improve your customer service or your customer satisfaction. And the easiest way in today’s world is of course, to use social media apart from the obvious benefit of giving you visibility and probably more business, it will give the customers the opportunity to express their feelings towards your company, your services, your product, and so on. You’ll get an idea of what you need to improve. I personally who went on a customer’s Facebook page a few days ago because they had a commercial on TV, which was let’s say discriminatory, right. And I express my opinion. So you’ll get to know you’ll get a, let’s say live feed into customer’s opinions of you, what, and, and you know, that someone will be 10 times more likely to report on a negative experience than a positive one. So I think that is a very important source of feedback that you need to tap into and make the necessary corrections.

Madhurima Gupta:
And you know how important is it to maintain cash flow and take credit decisions on data-driven insights specifically given inflation.

Olivia Rosca:
I think in times like the bees it’s important that you update your credit policies you don’t need a huge revamp of your credit policies, but what I do for, for example a lot of, and for this, first of all, you need to have some sort of credit policy which I strongly recommend for most businesses. I would revise the lower threshold or the contract amount for which a credit check is needed. Usually,if you have a contract for only 5k you would say, okay, the amount is too small. And I wouldn’t the effort put into making a credit check is not worth this amount, however touching on what we discussed earlier, if you have the right tool that will help you automate these credit checks, you can produce credit checks even for lower amounts, right? Because the effort, the human effort involved in that would not be that big. That’s how you combine technology and the information and the databases that exist out there to extend your reach. Also, I would also revise the maximum credit limits that I am giving to my customers. So if, until now I was allowing you know, just like a credit card three or four times their profit and so on. I would revise that for a limited amount of time, perhaps even increase for bad payers the frequency of the credit review. So if, until now I would review bad payers every three months right now, perhaps maybe I will do it every two months again, so that you don’t increase your labor cost with this, get the proper tool to help you do that right. To automate that. And you only at the end with the proper tool, you just need to approve or reject the proposed credit limit. And another thing that I would do is change the discount that you offer on advanced payments or upfront payments. A lot of companies have payment terms that look something like 2% discount, if you paid 10 days in advance lower that 2% a lot of customers will still take it, majority of them over 90%, but it will not be such a big impact on you or increase the number of days when you are giving it man, maintain the 2%, but put it 2%. If you pay 15 or 20 days in advance, instead of just 10

Madhurima Gupta:
You know Olivia, there is one observation that I had. We did a survey earlier this year with about 150 CFOs where we talked to them and asked them over a survey, what is their choice in terms of automation of different accounts receivable processes, while in collections, automation was at the top of the pyramid number or the percentage of CFOs and C-suite members that they wanted to automate these processes credit was much lower. Why do you think or in your experience, why do you feel that CFOs often push credit risk, mitigations, and automation of that processes to the back burner?

Olivia Rosca:
I think a lot of it has to do with availability of information. So companies that provide proper information on customers are crucial even if it’s just payment behavior. I think another reason is that even for their existing customer base, a lot of companies don’t keep proper records of their customer behavior. And again, this is why a tool is very important because you can’t measure payment behavior. If you don’t keep a database with their track record, right? If they had, let’s say two orders in the past five years, you still want to know how they paid. So if you think about it, actually both of them are availability of information, one from internal sources. So your you, yourself, as a company, don’t keep track of the payment behavior of your customer base. And the second one is lack of information from external sources, or let’s say because DNB and so on while they do cover high value customers, the low value customers are often not necessarily covered. So I think that’s one thing lack of information. And the second one I think is that a lot of companies are still stuck in a reactive environment. I like to think, for example, that collections is a redundant process. Collections shouldn’t exist. It’s a, it’s a defect of the entire order to cash cycle, right? If customers pay on time, you don’t need collections. You don’t if you invoice correctly, you don’t need dispute management. You literally don’t. So there are defects of the process and that’s why people have a, that’s why I say people have a reactive approach to it, right? They think about how to solve the effect instead of the cause a lot of time, I think those are the two major,

Madhurima Gupta:
That’s a very fresh perspective, even for me, you know, looking at collections and dispute management as defect, and you’re pretty rightly put it there, it’s happening because another process is not properly functioning.

Olivia Rosca:
Don’t get me wrong. I’m, I’m grateful for the defect because it’s been my bread and butter

Madhurima Gupta:
It’s my bread and butter as well.

Olivia Rosca:
But it’s a defect.

Madhurima Gupta:
So my next question is around you know, what are some of the AR practices that smart finance leaders should be implementing to ensure that their businesses are merged to manage? However, the future unfolds, you know, whether the pandemic is over or not inflation, maybe growing at a much higher rate or maybe even reducing hopefully. So what would you say should the practices be that smart finance leaders follow?

Olivia Rosca:
Well, I think I have a mantra for that. I think new technology and re-skilling is what will help you through, I’m not going to lie. Not everyone will make it through, but investing in the right technology and using those benefits to re-skill your talent. Because like I said, earlier, talent is going to be more and more expensive. It will be more expensive as a process and also as a resource to hire someone new than to maintain. And re-skill your current workforce. So in order to do that and make sure you use them for more value-added activities, you need to automate or introduce technology for non-value-added tests. So that’s in short, what I would say they would need to focus on. It might be that research and development or investment or expanding might take a back burner for now, because, well, this is a, a period of uncertainty and I do believe that it will take a little bit I don’t think we’re out of the woods yet.

Madhurima Gupta:
So that gets me to the last question of this particular session, Olivia, so on wall street more than half of the investments and economic professionals think that feds attempt to combat inflation by raising interest rates and running of balance seats will eventually cause a recession. What are your thoughts on that?

Olivia Rosca:
I think a recession is going to come. I, however, I think we can be in control if the right things happen it will not be very severe or it won’t be in terms of what we saw in 2008 2009. And I’ll, I’ll expand on, on both of these. So it will definitely come because well the situation in Ukraine and the impact on the supply chain overall does not seem to improve even worse. I think it’s it negatively impacts a lot of the developing economies in Africa, Southeast Asia and so on. China’s zero COVID policy, like I said earlier is impacting supply chain. And the possibility that COVID might make a comeback starting these months, especially because we’ve usually seen new waves come up once you know, seasons change especially in Europe, for example, and in America, where there is a seasonal change between August, September, and so salon American exports will be impacted because other parts of the world, and right now, by the way, 60% of world economies are considered to be in debt distress. So 60%, which is a lot so American exports will be impacted. Now the good part is that customers after the pandemic and after all of the stimulus bills that were introduced there is an influx of cash, right? Both in consumers, because while the restriction on movement and so on and, and everything did, and it caused people, not just the restriction of movement, but the pandemic itself caused people to be more cautious with their finances. So a lot of people do have an influx of cash and the stimulus bills, especially for businesses have also provided them with an influx of cash mm-hmm . So that’s why I’m saying it’s not that severe. However, the outlier here that we need to think of is at least in the us is the high partisan politics that we have. Right. And we have to remember that in two years we’re gonna have presidential elections as well. It’s highly likely that Congress will shift after the November elections and it will be controlled by the Republican party. Now, if a recession comes in the near future, the next six to nine months, I seriously doubt that the Republican party will support any kind of financial aid or bailout. Why? Because it would also mean supporting democratic president incumbent president. Right? So, and well, historically Republicans are not known for spending money, they’re known for saving money. there’s a, there’s actually a, let’s say a legend that Democrats spend money and Republican save them . So I don’t think that Republicans are going to make it easy for Joe Biden or any other Republican democratic candidate to be reelected. So while a solution to this would be, you know, lower, low, lower tariffs and more competition. What I think we will see is more populism more protectionism, maybe even comeback of let’s say previous presidential candidates, while again, we have the bases for a very mild or not such a severe recession. I think it’s not gonna be that easy. So while we, like I said, we might have a mild recession, the impact that all of this is going to have on the rest of the world.

Madhurima Gupta:
Cool. I think on that note with your opinions on whether the economy is headed toward its recession or not, I’d like to wrap up this session, Olivia, so thank you so much for taking time and sharing. Thank you as well. And I look forward to having you again on the circle sometime soon, and for our listeners out there, thank you for taking time as well. And listening in, I hope that this particular session helped you.

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