Is your credit function ready for the challenge ahead?

As we reported in our recent working capital report, pressure is building in the system, meaning that cash is becoming ever more constrained for businesses. This comes at a time when a record number of consumers find themselves in debt. In our recent report “Are Britons borrowing beyond their means?”, we found that the average household was £11,000 in debt, excluding mortgages - a year on year increase of 11%. And with consumer debt expected to rise, the pressure will only build for business. Businesses face a battle to secure their share of the consumers’ ever-dwindling cash pile.

In fact, most organisations will be affected. While the front line of this battle is the consumer-facing retail businesses, the effect will be felt throughout the supply chain. Local authorities and Government departments will also be impacted as they fight to secure their share of the consumer purse.

5 tips for protecting your cash flow

So how can companies protect their own cash flows. Cost cutting, financing solutions and controls over inventory and supplier payments are options. But here are 5 practical things to improve receivables management to maximise cash and minimise losses.

1. Enhance credit controls

1. Firstly, maximise sales to customers that can pay. There are plenty of customers with the means and willingness to pay. Good risk assessment practices will enable businesses to identify them and determine a safe level of credit, as well as identify customers with the capacity to buy more.
2. Secondly, mitigate the risk of offering credit to borderline cases. A wide range of options are available, including credit insurance, guarantees or reducing payment terms. Combined with controls over order release, these can be highly effective at limiting risk exposure.
3. Thirdly, proactive management of debt. Early engagement with high value or high risk customers occuring before the due date with prompt follow-up of overdues.

2. Reduce billing lag

Businesses that issue paper invoices (especially) will experience billing delays. This may only amount to postal time but often producing and issuing invoices can take days after the billing event. Any lag should be targeted for elimination or reduction. Any delay gives the customer an excuse to defer payment.

3. Optimise collection strategies

In B2B, segmentation based on risk and value is a sound basis for a collection strategy. In a high volume consumer environment though, this approach has limited impact in some sectors. Instead, strategies tailored to specific behavioural attributes are more effective. In short, one that pulls on a customer’s motivations to pay, rather than than their reasons for not paying.

4. Reduce billing errors and disputes 

In our experience a company that issues more than 1 credit note for every 25 invoices has a problem. But above this, there are still opportunities to improve. Businesses that aspire to eliminate invoice errors and correct mistakes quickly, get paid quicker and have lower costs.

5. Create a cash centric culture 

This is complex and takes time to realise. But a great starting point, and one lacking in many businesses, is a comprehensive measurement and targeting regime. In the Order to Cash environment these measures and targets need to be disseminated beyond Credit Control. This means that other functions, such as sales and logistics are measured and targeted on the levers of debt that they can influence such as average payment terms and picking accuracy, for example.

This article is the first in a series that explores in a little more detail specific areas of order to cash where, through our experience, we see the greatest opportunities for improvement.