Do your customers have cash traps? 5 questions to ask

By Ryan Frere, EVP & GM of B2B, Flywire.

When you consider how much global business faces in our current economic environment, it starts to look like a teaser trailer for the next summer blockbuster. You know the opening line well: “In a world where inflation lurks around every corner, interest rates are rising and geopolitical risk seems to be increasing every day…”

In the face of such growing challenges, Hollywood tells us, an unlikely hero often emerges. “…One department, one function, one process is capable of unlocking the cash needed to fight all these bad guys, freeing cash trapped on the balance sheet, and unleashing a torrent so fierce that none of the forces of slowing down economy can’t resist path to growth A/R stars in “Cash Traps” Coming soon to a theater near you.

It’s not that far. The cash conversion cycle is always a concern for CFOs, but especially now when these pressures have combined to create even more guesswork about when payments will arrive. Cost pressures and inflation top the list of CFO concerns in this quarter’s survey by Duke’s Fuqua School of Business and the Federal Reserve Banks of Richmond and Atlanta. CFOs surveyed expect unit costs to increase by 8% this quarter and, adjusted for inflation, average revenue is not expected to increase in 2022, down from actual revenue growth of around 3 % on average during the last quarter’s survey.

Identifying accounts receivable cash traps is now critical to freeing up that cash from the balance sheet. How can your department play a leading role here?

Do you have A/R cash traps? 5 questions to ask yourself:

Cash traps are typically concentrated in two areas: inventory and accounts receivable. We’ll keep the first one for later and let A/R play here. Here is some of what could be trapping your money.

Can you easily identify problematic accounts? Can you reliably tell who paid, how much, and who didn’t? Some of your customers are not good customers, and it may be time to review the relationship, or at least the terms of it. A best practice recommended by Deloitte is to review industry-specific metrics for DSO. Then dig deeper. How many invoices are overdue? Who pays earlier? How often does the sales team override standard terms? Are there any unapproved discounts?

Is your cash request process too manual? Is it easy for your A/R team to apply payment to customer invoices? Can you apply split or partial payments?

Is currency exposure a constant concern? The cost of hedging currency risk increased due to volatility and higher interest rates. Is the FX extremely complex? Does your business lose money on short payments and lack visibility into bank and payment processor fees?

Do you manage multiple bank accounts and payment partners? How many bank accounts do you manage worldwide and what is the total spend? How do you handle disputes over invoices? Can you easily manage chargebacks? Can you support multiple languages ​​and time zones when customers have questions? The longer the questions remain unanswered, the longer the money remains.

What is your plan for getting paid if key A/R personnel leave? If you rely on the specialist and institutional knowledge of specific people within your organization to get paid from certain accounts, what do you do when they decide to leave, for any number of reasons? In turn, what kind of business change skills are locked away in those finances that manually reconcile accounts every month? (Our surveys put that number at around 11-20 hours/month spent managing incoming payments that could be spent on strategic efforts).

Accounts Receivable Automation Can Help Free Up Money Trapped on the Balance Sheet

Introducing more digitization and automation into the A/R process can help thwart A/R cash traps. And it doesn’t have to be a massive project. A/R automation software can be configured and integrated with an existing ERP or CRM system and activated within weeks.

First, when cross-border payments are digitized and more of the collection and reconciliation process is automated, it is easier to draw conclusions from the data, as well as provide more accurate cash forecasts. With a real-time view of payments received, initiated, aging, refunded, and more by customer, country, and region, you can identify problem customers and see collection strategies working for the right ones.

The numbers also help justify difficult conversions. Is sales reluctant to change the terms for a customer – or are they abandoning them altogether? How can you justify pushing more resources after a good customer? Data makes it easier to have honest conversations about customer strategies.

Additionally, managing the complexities associated with managing currencies and collecting cross-border payments prevents many international businesses from planning for expansion. We’ve heard anecdotally that international DSO deadlines now extend well beyond 100 days. It is not because the reference progresses that it must become the norm. Offer a choice of payment method – including bank transfers, credit cards, local digital payment methods and more – and have a system flexible enough to handle different payment types (by which I mean things like partial payments) can help reduce international DSO.

Finally, one of the greatest value propositions of accounts receivable automation is that it frees up talented finance and accounting professionals to do more strategic work. We’ve heard time and time again the sentiment that if we get paid, the process works – when the truth is that the A/R team pulls off its own Hollywood exploits just to make it work. The cost of replacing a good employee is high for reasons you can measure (Gallup puts it at 1.5 to 2 times their annual salary) and for qualitative reasons you cannot.

And now for the surprise ending: an automated A/R strategy doesn’t just free up money, it can actually save the business money. For a SaaS company, for example, with annual recurring revenue of $60 million, manual A/R processes cost around $1.8 million. With accounts receivable automation, that cost can drop to $455,820, a savings of $731,321. It’s not a box office bust.

Ryan Frere is Executive Vice President and General Manager of B2B at Flywire. In a recent webcast, he discussed the ROI of an all-in-one A/R strategy.

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