Improving working capital during a pandemic – Guest blog by High Radius
How Organisations Struggle with Optimising Working Capital
Author: Philip Wassenaar, Enterprise Account Executive at HighRadius.
Because of the sudden outbreak of COVID-19, the world is slowly moving towards economic uncertainty. According to the UN Department of Economic & Social Affairs(DESA), this growing pandemic will impact supply chains and international trade on a large scale. They also mentioned that in 2020, the world economy might contract by 0.9%.
On one hand, where businesses are concerned about the well being of their employees, they are also concerned about how to sustain the cash in the business and maintain healthy working capital. If we break down the term ‘Working Capital’, it means:
Working Capital = Current Assets – Current Liabilities
Even if the senior management tries to optimise the liabilities, it is difficult to do the same with current assets as a lot of money is stuck within accounts receivable. This blog is aimed at Credit and Collection leaders who are looking for easy to execute tips in order to convert A/R to cash faster.
Cash is King: How to Ensure Steady Cash Flow During the Crisis
Assuming that the businesses are moving towards an upcoming economic slowdown, there are two ways to improve your working capital over time. How are the A/R teams contributing towards this goal of improving working capital?
The A/R Team’s Plan of Action to Improve Working Capital
We have the problem statement: How to improve working capital in your business? The easiest way to resolve this is by reducing DSO.
5 Effective Strategies to Reduce DSO
1. Portfolio Analysis and Change in Payment Terms
The global situation is so rapidly evolving that most credit teams are being forced to do a complete portfolio analysis just to figure out if the credit risk segments that they had traditionally identified are valid in the current times. Payment terms are perhaps the biggest weapon that a credit team has to reduce DSO.
For example, consider that you are doing a business with a mom and pop store that is likely to have a heavy impact because of the shut-downs. What if you could tweak the payment terms to 50% cash on delivery and remaining 50% to 20 days after the delivery date? There are many creative ways to enforce this.
2. AI-Enabled Prediction of Payment Dates Leading to Proactive Dunning Strategies
Almost 80% of your customers would want to pay you on time; it is just that they tend to forget. In the current scenario, it is more likely for them to forget as they might be fire fighting elsewhere. Imagine if your collector gets an estimate about when a particular customer is going to pay next. In that case, the collector could send a proactive reminder just to stay on top of mind.
It’s almost like getting a sneak peek into the astrologer’s crystal ball of fortune. With AI-enabled payment date prediction, your collection teams will be able to proactively plan the collection strategies as well as they will have a clearer visibility towards cash inflows.
3. Prioritising on Whom to Contact on a Particular Day
Did you know that a majority of collection calls go to customers who would have paid anyway? What if you could remove this wastage with AI enabled technology?
This way, the collector would be able to focus more on the end result of getting money in the bank..
4. Simplified Invoicing & Payment Experience for Buyers
Improving working capital does not end with credit risk analysis and proactive dunning strategies. You have to make sure that there are no glitches in your other processes such as billing & invoicing, cash allocation, disputes.
You have to figure out how to make the payment experience seamless for the customers. This can be done by pushing your small & medium sized customers towards credit card payments. Credit card payments provide a 30-day float for the buyer while the supplier receives the payment faster, essentially turning it into a win-win situation for buyers and suppliers.
5. Preferred Invoicing Process for your Strategic Customers
As the 80-20 rule states, you can generate 80% revenue from your 20% high-value customers. So, you have to focus on those strategic accounts solely. How do you invoice them? Emails or fax?
If you consider those 20% strategic customers, most of them prefer using A/P portals. In this case, using email invoicing could turn out to be redundant. With automated billing & invoicing, you will be able to push the invoices directly in the A/P portals making it easier for the A/P teams to pay.
Get access to 11 other strategies here: https://www.highradius.com/resources/ebook/11-proven-strategies-to-reduce-dso/
If you have any questions regarding how to reduce DSO at your organisation, please write back to us at tanya.arrowsmith@highradius.com.
