Business is no longer as usual in the mid-market as companies are struggling to face the increasing burden of outstanding receivables. With significant cash shortage and fewer resources available, mid-sized businesses are in a dire need of risk mitigation strategies that can help in recovering essential revenue.
Figure 1- A global study by Intuit QuickBooks on the State of Business Cash Flow
The #1 priority for finance leaders is to strategize and mitigate operational accounts receivables risks while maintaining a steady cash flow. Let’s go through some of the top concerns faced by mid-sized companies and understand how digital transformation can be a key enabler in ensuring business growth and profitability.
In 2020, we observed how the pandemic impacted the cash flow of most mid-sized companies resulting in an increased Days Sales Outstanding. Let’s take a look at the challenges faced by mid-sized companies concerning the maintenance and management of cash flow.
1. Lack of Access to Real-Time Data: The increase in the volume of invoices and rise in the dataset of customers makes it difficult to keep track of payments, customer history, and back-up documentation. Moreover, the lack of access to real-time data makes it difficult for teams to process receivables effectively and on time.
2. Paper-Based Invoicing: Companies that follow the traditional route of paper-based invoicing often find it difficult to keep a track of invoice delivery. Not only do these cost more, they are also error-prone and time-consuming and increase the overall time-to-cash.
3. Lack of Access to Digital Payment Formats: Many companies still rely on checks and cash as a mode of payment for their accounts receivables and payables. The major drawback of this payment format is the processing time and overhead costs associated with it. As payments take longer to reflect in the open AR, there is an increase in DSO which affects the cash flow.
4. Absence of Customer Segmentation: One of the most crucial tasks in order-to-cash processes is segmenting customers according to priority. In the absence of proper customer segmentation, companies find themselves rummaging through a large pool of mixed client details. This often leads to a delay while finding differentiators between higher and lower priority customers.
5. Manual Correspondence Systems: Companies often face the challenge of manually sending correspondences to the customers which requires a lot of time and effort on the analysts’ end. With an increase in the volume of customers, it becomes tedious to keep track of all the accounts.
6. Lack of Proper Dispute Management: Companies often face a huge loss in cash flow, because of the delay in payment processing and lack of access to real-time data. Dispute identification, in general, takes a lot of time for companies who keep a paper trail for all the transaction-related documents such as invoice, remittance information, PODs, etc. This leads to a longer resolution and recovery timeline and negatively affects the customer relationship.
7. Lack of Standardization: A collection of ambiguous data often leads to redundancy and errors. Different sources and formats of invoices and remittances makes payment reconciliation a nightmare.
8. Mishandling the Credit Requirements: In the absence of an effective credit management system, it is hard to track credit data of existing customers and also hampers new customer on-boarding. This may lead to an increase in bad-debt while impacting a company’s credit score and profitability.
While the economy is slowly trying to recover in a volatile market amidst a pandemic, the cash flow outlook of companies has taken a huge blow. Let’s take a look at how pandemic has worsened cash flow:
1. Inaccessible Paper-Trails : Companies who work on a paper basis have suffered the most due to lack of physical access to data, which in turn has slowed.
2. Remote Working Teams : Nationwide lockdowns and work from home through digital means has made it difficult for many companies to cope with the sudden intervention of technology.
3. Increased Operational Costs : The operational cost involving rents and bills has incurred a large amount of cash outflow in the companies alongside a poor cash inflow.
Business organizations across industries are optimistically looking forward to scale their company’s cash flow in 2021. As per the PAYMNTS Study on B2B Payment Innovation Readiness, nearly 75% of the SMBs are looking forward to automating their AR for faster processing, higher efficiency, and lower costs. Let’s look at how companies can switch from manual and paper-based functions to technology-enabled solutions to improve cash inflow.
1. Opting for a Centralized Platform : A centralized repository could be a one stop shop for AR teams for all information. This dissolves the issue of communication barrier between the teams and enhances workflow efficiency. This will not only help in easier collaboration but will also maintain proper visibility, access to real-time data, and process-transparency.
2. Offering Convenient Payment Options : Offering convenient and multiple payment methods such as ACH, Credit Cards, mRDC(Mobile Remote Deposit Capture), online payment gateways, and Self Service Portals can help customers pay in their preferred mode easily. When customers start paying on time, there is a reduction in outstanding receivables.
Figure 2- Benefits of Digital Payment Methods
3. Proactive Collections Process : Technologies like Artificial Intelligence and Machine Learning can help in automating the manual tasks involved in customer segmentation, correspondences, and customer prioritization. With the elimination of clerical tasks, finance teams can focus on proactive collections strategies and stay on top of high risk customers.
4. Dispute Management System: With the help of technologies like self-service portals, customers can directly raise disputes. Early dispute identification can help in faster resolution and recovery.
5. Credit Integration : A machine-based credit scoring system can help in faster and easier customer onboarding. Real-time credit risk reporting can help in reviewing customer portfolios faster to mitigate risk and reduce bad-debt.
Proactive management of accounts receivable can help in establishing a sustainable cash flow while simultaneously curbing top AR challenges. Adopting digital transformation has proven to be a catalyst to improve business performance, growth, and profitability.
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