Recent economic events following the COVID-19 pandemic seem almost surreal. Now that toilet paper is back in stock, we can focus on a more pressing concern that arose. When companies and families were instructed to shelter in place, it was widely expected that most would do so for a short duration, while living frugally off of savings or borrowings if necessary. However, instead of a controlled slowdown, almost immediately we saw the economy go into a fantastic tailspin right after the shutdowns were announced. This left us with several serious questions to answer.
Didn’t consumers and companies have 6 months of cash in reserve?
How could a supposedly robust economy have been so quickly derailed from a pandemic?
Only a few months ago, nearly half of U.S. consumers said they didn’t have savings to cover a $400 expense. It’s not just an American problem either: the BDO Canada Affordability Index showed back in September 2019 that over half of Canadians live paycheck to paycheck. Consumer debt in the U.S. hit a record $14 trillion at the end of 2019.
It’s not just an American problem
North American businesses are no different. Before the pandemic, businesses were sitting on a record $13.5 trillion in debt at the end of 2019. Basically, businesses have been playing the same game as consumers: use existing incoming cash to pay expenses, make some debt payments and continue to borrow for what was “needed”. In Corporate America there have been a few other strategies as well: use extra cash to buy back stock and provide dividends to shareholders. Saving for a rainy day seemed like a silly waste of money. When businesses needed money, they would borrow more of it cheaply. This financing strategy always catches up with businesses at some point. Company revenues begin to decrease, borrowing sources dry up, or both. Many companies became sloppy about managing cash flow. Generating positive cash flow in the past was not a priority because it was so easy to borrow the cash they needed.
Before the pandemic, businesses were sitting on a record $13.5 trillion in debt at the end of 2019. – CNBC
Fast forward to today
With months of the pandemic under our belt and millions out of work, businesses are facing decreasing revenues and suffering losses. Many companies are insolvent because instead of focusing on tightening up their internal controls and maximizing cash flow, they simply increased their debt. Today, borrowing more money isn’t so easy when you can’t show a way to repay it. Instead of passively managing their internal cash flow, companies have squandered opportunities to make these improvements since the last recession; they’re feeling the pain now.
A self-inflicted liquidity crisis
From a trade receivables perspective, we see the laziness in the studies and audits we perform. Creditors aren’t consistent about requiring applications from customers for credit; billing isn’t always accurate or timely; collections are a haphazard, erratic process; deduction management is a chaotic mess. The inattention to the incoming cash cycle set up companies for unnecessary bad debts, write-offs, and slowing payments. If these businesses had tightened up these processes when they had the opportunity, they would still be maximizing cash flow even as sales slow.
North American businesses are no different. Before the pandemic, businesses were sitting on a record $13.5 trillion in debt at the end of 2019. Basically, businesses have been playing the same game as consumers: use existing incoming cash to pay expenses, make some debt payments and continue to borrow for what was “needed”. In Corporate America there have been a few other strategies as well: use extra cash to buy back stock and provide dividends to shareholders. Saving for a rainy day seemed like a silly waste of money. When businesses needed money, they would borrow more of it cheaply. This financing strategy always catches up with businesses at some point. Company revenues begin to decrease, borrowing sources dry up, or both. Many companies became sloppy about managing cash flow. Generating positive cash flow in the past was not a priority because it was so easy to borrow the cash they needed.
7 steps to improve receivables. Pandemic or not.
The following steps can help quickly turn things around for your credit department. If tackling it seems daunting, we highly recommend connecting with a TCD Specialist for a free consultation and discover how we can help.
- Engage customers immediately with your expectations. Ask them to complete a “Customer Profile” or credit application during the initial intake process. If not done previously, inform customers you need to update their information on your system. Advise them of your terms and the consequences of paying outside these terms.
- Improve overall engagement. Effective relationships begin with providing customers with contact information for when billing questions arise.
- Analyze the risk on every single credit customer in your portfolio. Pull public records, credit reports, and bank information. Set a credit line plus risk rating and stick to it. The vast majority of losses we see were “exceptions” to the credit line recommended by Credit Departments who knew what the customers could afford.
- Create and execute the ideal collection process. Begin with a flowchart to visualize the process. Unless you have a few dozen customers or less, you’ll need help from collection software, such as WorkflowAR, to do this. It’s quick and easy to use this software in the cloud. We use a customized version of it in our collections outsourcing service offering. Don’t forget to escalate collection processes up to someone in your customer’s organization who can get you paid: a Controller, a CFO, or an Owner. This isn’t time to be shy about asking for your money; it’s time to be first in line for payment.
- Code every single past due invoice with a status, reason for dispute (if any) and expected pay date. This will allow you to segregate the disputes, understand the scope and feed those expected pay dates into your forecast. Forget about how customers have paid you in the past. This is a whole new normal. Get the specific payment information from the customer, by invoice, of when they will be paying. If you’ve done your credit analysis right and it’s up to date, you will know what to expect in terms of payments.
- Properly manage big box retailers. If you sell to Amazon, Walmart, Best Buy, or any big box retailer, you MUST track their chargebacks/deductions in software to measure the impact, provide for workflow to get these things cleared, and work on a plan to prevent these going forward. These deductions will KILL your profit margins if you aren’t aggressively managing each and every one of them. The lack of process in this area will create an out-of-control Accounts Receivable. We use our cloud-based SMART system to manage these and unpaid invoices.
- Report on every dollar past due in your trade receivables portfolio. This will help identify trends early on and deal with customer risk and payment issues.
Remember: pandemic or not, Cash is King.
'%3e%3cg id='Final-Copy-2_2_' transform='translate(1275.000000, 200.000000)'%3e%3cpath class='st0' d='M7.4,12.8h6.8l3.1-11.6H7.4C4.2,1.2,1.6,3.8,1.6,7S4.2,12.8,7.4,12.8z'/%3e%3c/g%3e%3c/g%3e%3c/g%3e%3cg id='final---dec.11-2020'%3e%3cg id='_x30_208-our-toggle' transform='translate(-1275.000000, -200.000000)'%3e%3cg id='Final-Copy-2' transform='translate(1275.000000, 200.000000)'%3e%3cpath class='st1' d='M22.6,0H7.4c-3.9,0-7,3.1-7,7s3.1,7,7,7h15.2c3.9,0,7-3.1,7-7S26.4,0,22.6,0z M1.6,7c0-3.2,2.6-5.8,5.8-5.8 h9.9l-3.1,11.6H7.4C4.2,12.8,1.6,10.2,1.6,7z'/%3e%3cpath id='x' class='st2' d='M24.6,4c0.2,0.2,0.2,0.6,0,0.8l0,0L22.5,7l2.2,2.2c0.2,0.2,0.2,0.6,0,0.8c-0.2,0.2-0.6,0.2-0.8,0 l0,0l-2.2-2.2L19.5,10c-0.2,0.2-0.6,0.2-0.8,0c-0.2-0.2-0.2-0.6,0-0.8l0,0L20.8,7l-2.2-2.2c-0.2-0.2-0.2-0.6,0-0.8 c0.2-0.2,0.6-0.2,0.8,0l0,0l2.2,2.2L23.8,4C24,3.8,24.4,3.8,24.6,4z'/%3e%3cpath id='y' class='st3' d='M12.7,4.1c0.2,0.2,0.3,0.6,0.1,0.8l0,0L8.6,9.8C8.5,9.9,8.4,10,8.3,10c-0.2,0.1-0.5,0.1-0.7-0.1l0,0 L5.4,7.7c-0.2-0.2-0.2-0.6,0-0.8c0.2-0.2,0.6-0.2,0.8,0l0,0L8,8.6l3.8-4.5C12,3.9,12.4,3.9,12.7,4.1z'/%3e%3c/g%3e%3c/g%3e%3c/g%3e%3c/g%3e%3c/svg%3e)
Your Privacy Choices