How Private Equity companies can improve valuations in 2022.

In evaluating whether your portfolio companies are maximizing cash flow from its Receivables, you should ask two questions: 

1. Are the Credit Departments in my portfolio companies effectively and efficiently managing the trade receivables asset?
2. What resources are available to help us achieve the highest available cash flow from the Trade Receivables Asset?

Conducting a proper evaluation begins with five important steps.

1. Hold your Accounts Receivables team accountable for accurate cash flow forecasts.  Effectiveness in receivables management means cash is turning quickly.  Is your credit manager providing accurate daily and weekly forecasts of incoming cash from customers?  Do projected pay dates come and go with little explanation as to why forecasts were not met?  Does the company rely on inaccurate reporting methods, such as simple DSO (with no adjustments for disputes and terms exceptions) or due dates?  If any of these circumstances apply, you can be encouraged that these present real areas of opportunity to improve the accuracy of your forecasts and to become laser-focused on incoming cash.
2. Measure what the team members accomplish.  The sudden and explosive growth of teams working remotely has precipitated major challenges for companies.  The most glaring of these challenges is the inability to track various receivables management activities.  It’s usually not until expected customer payments are missed that companies realize there are problems.  Inadequate follow-up, skills training, or lackluster performance by team members in accomplishing required tasks are always going to make cash flow suffer.
3. Insist on reviewing process flows for each type of work performed in your A/R Department.  It is extremely difficult to be certain that you are getting the most out of your resource investment until you can review well-constructed, easy-to-understand processes.  These processes should show who is involved for specific tasks incorporated in each collection, credit, reporting, and dispute management process.  If your Credit Manager has not designed these for the company, it is unlikely the inefficiencies have been squeezed out of your processes.
4. Automate all manual processes.  Do collectors still add notes in spreadsheets to track collection activity?  Are analysts wasting time manually matching open items on a customer’s portal to a database or spreadsheet for statuses and pay dates?  Are you manually billing invoices to customer portals or even now sending individual email invoices out? Automation should remove the need for most of these manual processes. If you do not already utilize bots, API, and/or computer programming scripts in your Receivables management process, you are probably wasting money on labor-intensive processes that should be automated. As a caution, do not proceed with automating until step #3 is complete.  You will waste time and money trying to work around unproductive processes.
5. Ensure priorities are correct.  Is your portfolio’s A/R Department focused on confirming prompt payment on the largest items first to maximum cash flow?  Is there robust, detailed reporting on the top 25 past due customers, allowing your credit department to focus their efforts on getting you paid? If you have collection software, it should be relatively easy to compile these details and have good insights on payment statuses. Good, reliable data will allow a credit department to quickly resolve disputes and confirm pay dates.S