How to Upgrade Your Accounts Receivable Strategy

For many businesses, Covid-19 heightened management’s focus on cash, disrupted supply chains, and reduced sales. As a result, accounts receivable (A/R) departments faced increased pressure to facilitate faster receipt and application of payments. Caught off-guard, many patched together short-term fixes to automate their receivables workflows and accelerate cash application.

As the pandemic continued, many of those organizations turned their attention to payments activity. They evaluated their options for moving away from paper and manual processes toward electronic and automated solutions. As a result of this process, many companies accelerated their payment technology roadmaps, sometimes implementing technologies they had not even considered prior to Covid.

Now, those companies must dedicate that same level of focus on comprehensive improvement to re-evaluating the A/R processes that may have fallen by the wayside after early-pandemic quick fixes. With some research and help from their banking teams, A/R and treasury professionals can find technology solutions that streamline their receivables processes along three vectors: digitizing and automating A/R processes, optimizing the client experience, and revising their credit strategy.

1. Automate cash application.

When organizations had to abruptly shift to remote work 18 months ago, those that relied on manual and paper processes struggled the most. Companies that had already shifted to receiving electronic payments could collect much faster—sometimes in real time—which reduced their days sales outstanding (DSO) at a time when timely cash flows were crucial to survival.

For businesses that are receiving most payments electronically, the next step should be to leverage technologies such as digital workflow tools and electronic data interchange (EDI) to automate the cash application process. These tools can help with invoice delivery, receipt of remittance information, and easing the transition from paper to electronic payments for customers who haven’t yet made the move. The end goal of these solutions should be to automate everyday A/R operations so that the software matches the vast majority of payments to open invoices, freeing up accounts receivable staff to focus on exceptions.

Bank providers can assist treasury teams in the capture of remittance data. They can also help consolidate remittance and paper and electronic payments into a single file that the corporate enterprise resource planning (ERP) system can ingest. To take things a step further, the organization can implement matching rules so that payments automatically post.

Companies may also want to automate notifications related to collections. Look for A/R solutions that include integrated credit management tools which automate collections communications by sending out reminders anytime an invoice is a certain number of days past due.

As a company shifts to electronic payments, its relationship with each customer should guide its approach. Best practices include:

• For new customers, encourage adoption of electronic payments during the on-boarding process.
• For existing customers, continue to recommend the transition. Consider offering incentives or disincentives, such as extra services or fees, to convince reluctant clients to make the switch from paper.

2. Optimize the client experience.

As a growing share of the labor market consists of young people, whose preferred payment methods are electronic, companies need to be offering customers in this demographic the ability to pay in a way that aligns with their expectations. Treasury teams should be analyzing their current receivables solutions and investing in streamlining processes. This review may include:

• Payment methods’ ease of use. The easier it is for clients to make payments, the more likely they are to do so. Start by giving customers the option to pay immediately via credit card, checking account, or app.
• Payment methods’ compatibility with customer preferences. Enabling customers to use their preferred payment method can help maximize adoption. Consider adding digital wallet, kiosk, mobile, pay-by-text, and/or real-time payments.
• Degree of automation. Automating customer invoicing involves sending notifications directly to customers’ A/P teams via email or EDI. Treasury teams should ensure the company is sending invoices to the right place by verifying the A/R team has complete and current contact information for all customers.

3. Re-evaluate the company’s credit strategy.

During the pandemic, many organizations saw more late payments and delinquencies. In response, management may have directed the A/R team to adopt more aggressive collection techniques and to allow for alternative payment channels to collect funds. They may not, however, have revamped their overall credit strategy. It’s now time to do so.

Easy credit terms can boost sales, but they can also increase losses if customers default. Organizations need to take a hard look at their credit strategy. Are current customers’ credit lines too high? Too low? Does the company’s current approach to offering customers credit bring in enough new business to make it worth the time and risk of not getting paid?

Consider renegotiating customers’ payment terms, providing incentives to pay sooner and offering customers short-term relief in exchange for prompt or partial payments.

Meanwhile, for new clients, try implementing a four-part credit risk assessment that examines:

• Internal data, including customer order history, credit terms, and master data;
• Economic indicators, including the customer’s industry or regional impact, credit rating, and Dun & Bradstreet data;
• External data, including industry-specific data such as liquidity indicators, customer segmentation, and government support of the industry; and
• Other factors, including logistical disruptions, labor availability, and other sociopolitical and geopolitical risks.

Assessing customers’ credit risk is an ongoing process. It’s best practice to conduct periodic customer reviews that incorporate key performance indicators (KPIs) to ensure the customer hasn’t experienced a significant change in any key risk areas.

See also:

• Taking Credit for a New Approach to Risk Management
• More Certainty in Credit and Collections
• The Finance Leader’s Guide to Preparing for an Economic Downturn
• Credit Management Technology Plays Catch-Up
• Give Them Credit

It’s also important to continuously monitor the A/R team’s efforts: Be sure to include the department’s percentage of bad debt writeoffs and average days delinquent, especially as A/R systems and processes evolve.

Upgrade Accounts Receivable

Regardless of where an A/R department is in its digital journey, the team can make adjustments that improve DSO and the cash conversion cycle. Treasury and A/R staff should do their research and lean on their banking relationships to choose the best technology solutions for their organization.

Kimberly Isaacs is an executive director in the corporate treasury consulting team of J.P. Morgan’s Commercial Bank covering the U.S. West Coast. She works to identify, strategize, and drive change for corporate treasury’s challenges through strategic dialogues, analyses, and process improvements in order to create positive and lasting impacts. She provides treasury insights and best practices on several topics, such as working capital optimization, treasury centralization, business process re-engineering, and A/P and A/R migration strategies. Prior to working at J.P. Morgan, Isaacs held multiple roles within corporate treasury managing global cash and M&A integration activities.