The economic downturn makes the present a tough time to retool your accounts receivable process, but doing so can improve your cash flow at a vital time, specialists said in a CFO.com webinar. 

Improving receivables is best considered a strategic function because you can't do it without collaborating with other functional areas of your organization, said Todd Glassmaker, director of finance and working capital transformation at The Hackett Group.

Reducing problems like invoice disputes, short pays and delinquencies must start with customer onboarding, which means you need to work with sales and others involved on the front end, Glassmaker said.

"I don’t think we can stress enough how important it is to have a real clear understanding of the onboarding process for customers," Glassmaker said. "How do you manage the credit management process? What are the terms of the contract? How are customers going to engage in the billing process? How are they going to remit payment? What are the guardrails if the company becomes late on its payments? If that onboarding process is executed well, it’s going to allow you to minimize bottlenecks and breakdowns."

Global process owner

Glassmaker recommends companies establish what he calls a global process owner to bring together all of the functional areas — sales, procurement, supply chain, finance, and others — so there's agreement upfront on, and visibility into, onboarding and payment terms and all areas have a stake in timely remittance of payments. That helps create a cash management culture that’s needed to get all parts of the organization vested in smooth payments. 

"Look at how you provide incentives," he said. "Get a working capital element tied to commissions or sales compensation, and embed that cash culture into other parts of the organization."

It also helps to segment your customers into buckets based on the risk they pose, he said. Large, well-capitalized customers need less time; put them in one bucket. Smaller customers, or those on shakier credit ground, should be kept in a different bucket so you can monitor them more closely and intervene earlier if need be. 

Graham Smith, an account executive with Esker, a company whose software provides an automated solution for the AR function, called segmentation especially important today, when the business outlook is so uncertain, because it can make the difference in how much revenue you generate in the months ahead. 

"Amounts of these smaller customers really add up over time," he said. "If you have 500 $20,000 invoices, that means a lot more than the $1 million invoice."

Using software that automates the routine aspects of the AR process frees up staff time to concentrate on the exceptions, which is where you want their attention to be focused on, he said.

"Your order-to-cash cycle doesn't have to be manual," Smith said. "If you automate, you free up the organization to allocate staff to focus on pain points."

He called Trek Bicycles an AR automation success story because it reduced past-due invoices by 4% by giving staff early visibility into problem accounts, and a way to use smart tools to counter pushback.

"Excuses like, 'I never received that invoice' is no longer valid, because we can show you received and opened it," he said. 

Six tiers of action

To get started on a retooling, Glassmaker recommends looking at six tiers of action: 

• Onboarding. The process should be well understood by all functional areas, seamless in how the contract was established, and have a good billing execution process, including details on how a customer is to remit timely payment. 
• Segmentation. Because customers are not equal, but have different risk profiles and are of different sizes, create separate buckets for them based on the risks they pose so you can prioritize collections. 
• Dispute management. Have a clear process that reaches out beyond finance and gets buy-in from others parts of the business. 
• Escalation protocol. Work out ahead of time how you’ll engage other parts of the organization to help drive mitigation of delinquent receivables. 
• Cash management culture. Revamp incentives to sales and other functional areas to get a working capital element tied to commissions or sales compensation and “embed that cash culture into other parts of the organization,” he said. 
• Enabling technologies. Automated solutions can play a role because they increase visibility into the credit risk customers pose and handle routine tasks so your AR staff can focus on the exceptions — those customers who aren’t paying. 

It can be hard to think about revamping the AR process now because of the upheaval executives are wrestling with, but by doing so, you can help bring in more money when you need it. "A lot of organizations are trying to extend payments out, given the crisis we're facing today," Glassmaker said. 

Top Risks in Accounts Receivable — And How Finance Leaders Overcome Them was sponsored by Argyle and Esker.