Accounts Receivable from A Strategic Cost Reduction Perspective

In our May 12, 2020 article on "How to Cut Costs using a Strategic Cost Reduction Approach", we outlined the need for companies to review their balance sheet as part of a strategic cost reduction exercise. Understanding the linkage between balance sheets, cash flow statements, and income statements will help businesses to realise how the management of one can have good or bad consequences for the others. For example, inefficient or ineffective accounts receivable practices can lead to increased financial charges. However, if you're on top of your accounts receivable practices, cash will flow into your company quicker, thereby putting less strain on your business to find the money you need to pay your bills. This article will explore this in more detail and explain the cost reduction benefits that can be derived from good accounts receivable management.

Credit Control

As the saying goes "prevention is better than cure". Strong credit control policies will help an organisation to reduce its bad debt levels and get paid faster by its customers. Credit control management is always important for the health and sustainability of a business and especially when dealing with new customers. As Brexit imminently comes into full effect starting 1 January 2021, Irish companies may find it useful to look to other EU countries for tariff-free trade. Bearing in mind that although trading with the UK might be less advantageous post-Brexit because of the introduction of tariffs, you'll be exposing your company to new risks and challenges (e.g., with regard to payment) should you choose to enter a new market.

Some good credit control tips for the proactive management of new and existing customers include:

• Share terms and conditions of trade with new and prospective customers from the onset of doing business with them;
• Ensure that the terms of trade are periodically reviewed by a legal firm with a good reputation;
• Check the credit rating of new customers if possible, and require that they provide 50% to 100% up-front payment for goods or services you provide depending on the level of their potential risk;
• Adopt the use of credit insurance or letters of credit as relevant for your business;
• Provide credit terms to only longstanding and trusted customers; and
• Revisit your credit terms on an ongoing basis, so that you don't fall into the trap of seeing trusted customers becoming your worst debtors over time.

Account Management

All customers should be account managed and strategically tiered into 3 to 5 tiers, based on how much they spend with your organisation and their strategic importance to the business.

Your Tier 1 customers can be identified as those who make timely payments for goods and services, are easy to deal with, place large purchase orders with your sales team, provide good margins to your organisation, and understand the importance of good supplier management. Use the data that you already have within your business to make your assessment, e.g., to quantify their current spend level, and the products and/or services they currently buy from your company plus any others you think they'd value.

Develop strong relationships with your Tier 1 customers as part of your account management strategy. Meet with these companies to let them know that they are your Tier 1 customers. Schedule yearly or more frequent meetings to discuss how you plan to take care of them as a Tier 1 customer, and use the opportunity to identify any issues that you need to address and any additional ways that your company can offer them the support they need.

You should also ensure that you are not overly dependent on one key customer, region, or industry. Brexit and COVID-19 has reminded us of this sage, risk driven approach to market diversification. Additionally, COVID-19 has made many of us recognise the need to adopt an appropriate product diversification strategy to aid our companies to remain sustainable during difficult economic conditions. Outside of economic uncertainties, a good diversification strategy will simply aid you in growing your business.

Accounts Receivable Management

The more efficient your accounts receivable management, the more efficient your cash conversion cycle. Therefore, if it takes 60 days from the purchase of raw material to the sale of goods, the quicker you'll get paid for the goods sold, and the quicker you'll have cash to buy more raw materials.

Bearing that in mind, it is important that all invoices are issued with clear payment terms (e.g., cash on delivery, 15 days, or 30 days), depending on the particular credit terms you agree with each of your customers. Also, the invoices should ideally accompany all sales order deliveries or be issued as quickly as possible following each delivery. In addition, you can send your customers reminders of when payment dates are getting close, to maximise your chances of receiving their payments on time or even well in advance. Furthermore, learn their payment processing dates, so that you can ensure that your payment reminders are sent to them early enough to ensure that you can get your payment on time. Finally, don't hesitate to get in touch whenever a payment is late, or to use the services of a collection agency if you find that you're unable to get paid.

If working capital management is a constant source of stress, a review of the core funding options available to you (e.g., trade finance, factoring, invoice discounting, and offering of discounts) can help to alleviate your cash flow problems.

Cost Reduction Benefits

In reviewing your accounts receivables from a strategic cost reduction perspective, you will be able to realise benefits such as the following:

• Strong credit control frees up staff time for revenue generating and performance measuring activities;
• Following your cash and investing time in account management activities will result in high margin and easy to deal with customers, which will save your company precious time and money and maximise your profits.
• The more efficient your accounts receivable processes, the lower the non-strategic cost will be to your organisation in terms of staff overhead, the length of time to get paid, and the cost of capital (finance charges).
• Selecting the right funding options can result in lower finance costs and help to free up trapped cash that can be put to other uses within the organisation, e.g., to pay staff, pay suppliers, and purchase new equipment.

Revisiting your accounts receivable management approach is worth adopting for any business. In a nutshell, it helps companies to reduce their likelihood of receiving unpaid invoices by putting in place extra controls to monitor and manage payments.

Remember, you can use Sluamor if you're looking to make new business connections, e.g., to deliver your product and/or market diversification strategies, or source new suppliers of the products and/or services you need.  Send us a message via our Contact page if you'd like to discuss, or you can forge ahead and subscribe to share your requirements.

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