How to Manage Cash Flow in COVID: Accounts Receivable Tips

1. On May 13, 2020, the U.S. government's Congressional Research Service published a report titled COVID-19: U.S. Economic Effects, highlighting the severe economic downturn caused by the pandemic. The report noted a significant 4.8% drop in first-quarter GDP, a 7.3% decrease in inflation-adjusted personal consumption spending, and a projected 11.4% average unemployment rate for the year. These figures demonstrate the deep financial impact of the pandemic, with the full repercussions still unfolding.

   As cities across the U.S. attempted to reopen, many faced setbacks due to rising virus cases, leading to partial shutdowns in some areas. While a few cities, like those with more controlled outbreaks, have cautiously reopened their economies with some success, there is still much uncertainty. With the virus continuing to spread in hotspots like Florida, and no clear timeline for a vaccine, businesses are facing a tumultuous road ahead.

   In such an unpredictable environment, businesses are finding it especially difficult to manage accounts receivable efficiently. How can companies maintain their cash flow when payment collections are delayed and the economy is uncertain? One solution is accounts receivable triaging, a method that helps prioritize invoices, streamline collections, and increase the likelihood of timely payments.

   Accounts receivable triaging can be a game changer for businesses navigating through uncertain times. This strategy helps companies efficiently manage their invoices, allowing them to focus on the most critical payments first. For those seeking additional support, outsourcing A/R management can relieve the burden of handling this task in-house, enabling businesses to allocate resources elsewhere. Resolve’s 4-step outsourced A/R strategy is an excellent option for eCommerce businesses looking to improve cash flow and reduce late payments without dedicating internal resources to the process.

   By offering net terms easily through our payment gateway, getting more customers on board with quick approval, making sales, and automating invoicing and collections, Resolve ensures businesses can stay afloat and thrive, even in the face of ongoing economic uncertainty.

Determine probabilities and risk profiles of your customers

Determining the risk profiles of your ecommerce customers through accounts receivable analysis can be performed in several steps.

1. Create a list of customers who you have the most exposure to A/R risk.

2. Of those customers, what is their ability to continue making on-time payments (to you and their debtors) and do they potentially have any insolvency issues? Rank those customers from most financially healthy to least.

3. Calculate your days of sales outstanding (DSO) across all invoices and group customers who have the largest DSO.

4. Of those customers with the highest DSO, try to negotiate better payments terms (for your business). You may have to offer a discount for early payments, which will help raise working capital.

You may find that grouping customers into various tiers makes contacting them a little easier and provides better prioritization for teams. However, if you are a small company and don’t have that many customers, creating tiers probably isn’t worth the effort.

Decide if there are customers that you're willing to forgive as a measure of goodwill

Some customers will likely experience hardship due to the economic shutdown. You’ll have to start deciding how much those customers are worth to you. If you believe keeping a long-term relationship in-tact is important, forgiving some of their debt will go a long way to solidifying your relationship with the customer. Let’s look at debt forgiveness in a little more detail.

Advantages 

There are many advantages to forgiving a customer’s debt. Just to clarify, forgiving debt doesn’t mean you have to forgive 100% of a customer’s debt. It can and likely will be partial debt forgiveness. 

If the customer is in a temporary slump, such as the current economic crisis, and has always paid on-time, it can be worth forgiving some of their debt. Rather than sending them to collections and probably not collecting much, if anything, you’ll ensure future cash flows at the expense of receiving none or little now.

Disadvantages

The most glaring disadvantage of forgiving is forever foregoing cash flow. That is cash flow that you won’t get back. Additionally, even if you’ve done all of the necessary client risk profile analysis, there is no guarantee that the client will actually resume payments once things return to normal. Any future projects that are based on projections of clients resuming cash flows will come undone if those cash flows don’t reappear. This can be devastating to future plans that depended on those cash flows.

Of course, deciding to forgive debt or not doesn’t matter if your business is struggling. You really have no choice but to try and capture as much cash flow as possible. This means debt forgiveness is probably out of the question.

Extending longer credit terms to customers

Offering customers longer credit terms can be a competitive advantage. Average A/R net terms for customers vary across different industries. Some companies will choose to offer better net terms than their industry’s average. Offering better net terms can result in attracting new customers. Being able to delay payments to a vendor is always a benefit for customers since they can utilize their working capital longer.

Not all customers should receive credit extensions. Only your best customers or new customers with excellent creditworthiness should be offered longer credit terms. You only want the most reliable and financially stable customers to be given the opportunity to delay payment.

Determining creditworthiness

Creditworthiness is a customer’s ability to meet their debt payments on-time, every time. These customers also have a solid history of on-time payments. There are a few factors that go into determining creditworthiness.

• Risk profile — we discussed risk profile above. Those customers that are low risk are great candidates for longer credit terms.
• Years in business — companies that have been around longer can show more history of income, on-time payments, and stability through different cycles. Examining the performance of a company should be part of your creditworthiness analysis.
• Size of business — bigger doesn’t always mean better. However, a large company that has been around for a while generally has more resources to weather a storm than a smaller company. Still, be sure to perform a thorough analysis of the client’s credit history and the potential to pay.
• Background check — when you apply for credit, a bank or credit card company pulls your credit report from one of the three credit bureaus. You can do the same credit check for businesses. Business credit is different from personal credit and not all businesses will have business credit. For a business to have a credit profile, its merchants must report the business’ payments to the reporting agencies. These agencies include Dun & Bradstreet (D&B) and Experian. Checking business credit is not free but is also not expensive and is well worth it.
• Check references — ask for references such as banks, merchants, and different companies the business has made payments to. Be aware that just like trying to check new employee references, some merchants may not be willing to disclose any information because of privacy and fear of being sued.

Pull in some of your receivables to reduce your a/R book exposure

Checking the creditworthiness of potential customers is not a straightforward process, and it is time-consuming. Depending on how much background and analysis you perform, the process can be expensive as well.

Rather than doing all of this tedious work on your own, why not outsource it to the experts? This is what Resolve is best at. They can process new customer credit applications, determine creditworthiness, and handle the bulk of your A/R workflow.

Here’s how it works:

• You open a new Resolve account and add the pay by invoice option to your website.
• New customers see the option to pay by invoice and apply for credit terms.
• Customers are approved within one business day.
• Resolve does the necessary creditworthiness analysis.
• Based on the customer’s creditworthiness, they receive 30-60 day net terms.
• Once a customer pays, you don’t have to wait for the number of net term days to receive your funds. Funds will be immediately deposited into your account and the customer will receive a receipt of their payment.

With Resolve, you no longer have to do any of the heavy A/R processing. Your A/R process is off-loaded and automated, allowing you to focus on what you do best — running a successful business.

Resolve knows that sometimes, even with the best intentions, invoices become overdue. To help in collecting overdue and old invoices, Resolve also has access to a network of professional collections agencies. Additionally, you can configure invoice chasing.

It’s difficult enough to run an efficient A/R when the economy is working under normal conditions. But throw in a pandemic, and the entire business can put a huge strain on any business. Gain a competitive edge today by outsourcing your A/R with Resolve.