Why Finance Order_to_Cash is pivotal in uncertain times

As always, during a global economic crisis Cash is King for businesses and Credit Management organizations find themselves under the spotlights. More so than ever, professional Credit Management is critical, no matter how big your business might be.

by Evelyne Legaux on 07-04-2020

A lot of related content is circulating at the moment, and I have been reflecting on how best to provide practical advice to and share thoughts with businesses.

The Landscape

It is clear that the Covid-19 pandemic crisis will have a dramatic lasting effect on economies across the Globe, with some geographies (e.g. oil producing countries as a result of the subsequent fall in prices) and some sectors (aviation, tourism, retail, …) being hit harder than others.

The most severely impacted countries will face the deepest economic recession since WWII in 2020, and might default on their sovereign debt payment obligations despite easing liquidity measures taken by Central Banks around the world.

At micro-economic level, more and more businesses across all geographies and sectors are facing Cash Flow difficulties and struggling to find the cash needed to settle their trade & other payables.

 

Additionally, lockdown measures in place across a majority of countries around the world will have a significant adverse impact on existing payment arrears and delay any pending Court proceedings. Further, whenever Courts resume, extra challenges will arise in countries with complex and/or lengthy legal debt collection enforcement proceedings, even where the local legislation appears favourable to creditors.

So, Cash is King and now is a time when Credit professionals are facing their biggest challenge ever. Contingency planning is therefore essential, and adapting your AR & Credit Management policy to deal with this unprecedented situation is paramount. 

So, where should your Action Plan Focus be?

People

. What are the staff & skillset risks to your business? What is the workload impact during and after the Covid-19 crisis?

. What is your contingency plan? Do you need to bring in temporary external resources or to outsource now &/or in the aftermath of the crisis?

Process

. Review your general T&C’s of trade to protect your receivables and stocks. Where feasible, take action to be a primary Creditor in your trade contractual terms, or from your customer’s business perspective.

. Review your end_to_end AR process. Does it need to be adjusted due to current restrictions or regulatory measures (e.g. invoices may need to be sent to a different location)?

. Do FX fluctuations impact your ability to collect? If so, should you consider changing billing currency or temporarily accepting payments in another currency?

. Cash is King à Prioritize Cash Flow forecasting, incorporate known risks to improve accuracy, adjust the analytical level downwards and increase frequency.

. Revisit your Bad Debt reserve approach to make it more flexible and inclusive of specific known & general unknown risks.

Operational – AR Collections

B2B businesses should act swiftly and demonstrate pragmatism in dealing with their customers:

. Review your AR ledger thoroughly with a critical mind set to identify Collections risks: do you have customers located in high risk geographies? do you have vulnerable customers who may not have access to the cash needed to pay you?

. More so than ever, know your customers: talk to as many of them as possible to understand their own business and Cash Flow circumstances. Encourage them to avail of financial support schemes introduced by local authorities, wherever available & relevant.

. Before granting any payment delays or extension of credit terms, analyse your customer’s financial forecasts to be comfortable that they will have the repayment capacity over the period of time at stake, and make sure that such delay is acceptable to your own company as well from a Cash Flow standpoint.

While being flexible and saying “Yes” to extra time to pay might ease the immediate Cash Flow distress, any prolonged inability to pay could potentially mean loss of revenue and additional borrowing needs for suppliers which, in turn, could affect their own risk rating and ability to extend credit in the future. On a larger scale, this could then trigger a serious domino effect preventing trade itself from happening!  

. If you owe monies to your customers, do pay their bills on time. Likewise, pay your own suppliers on time if not earlier than contractual terms, to enable then to pay their own suppliers in turn.

On a larger scale again, when companies adopt healthy payment behaviours, a positive multiplier effect on all businesses in the supply chain is triggered that benefits all! Retaining cash in-house would be counter-productive and potentially suicidal in the long run.

Operational – Credit Risk Management

More so than ever before, Credit professionals should implement a strategic process of customer portfolio segmentation for analytical review, risk category assessment and action. Segmentation can be by geography, industry, account size, business stream or whichever else is meaningful to your business.

The purpose of such exercise is to obtain a “big picture” view of your customer base risk level. The insights and hidden value that such analysis unlocks is highly valuable to any businesses of a substantial size.

Segmentation also helps drive the establishment of analytical standards & consistency in terms of Credit decision making across the entire customer portfolio.

Furthermore, as a substantial business enabler, portfolio analytics allow Credit professionals to position themselves in a pivotal role by driving revenue and profitability, and therefore creating value.

Credit professionals should also revisit their company’s:

. risk mitigation approach and optimize usage of available tools such as Letters of Credit, first demand Bank Guarantees, etc…

. Credit Management policy with regards to insuring trade receivables or not. Credit professionals should consider trade Credit Insurance programs as EU States recently agreed to give guarantees to Credit insurers to prevent any massive coverage cuts as insolvencies are expected to rise in Western Europe by circa 2% in 2020 compared to a slight fall in 2019.

 

Conclusion

More so than ever before, professional Credit & Collections Management is critical when businesses struggle to survive. Credit Managers must do everything to prevent a crisis from turning into a catastrophe!