How to Manage Cash Flow in COVID: Accounts Receivable Tips

On May 13, 2020, the U.S. government’s Congressional Research Service published a report titled COVID-19: U.S. Economic Effects. It found that first quarter GDP fell at an annualized rate of 4.8%. Inflation-adjusted personal consumption spending in March fell by an annualized rate of 7.3%. The Congressional Budget Office (CBO) has projected that unemployment for 2020 will average 11.4%. Clearly, COVID-19 has had a drastic, negative impact on the economy. Its full effects have not yet played out.

As cities across the U.S. have tried to re-open, many have had to pause or been pushed back into partial shutdowns. This due to a large increase in virus cases. Some cities have managed the virus better than others and opened their economies more slowly with some success. 

The virus is spreading uncontrollably in some areas of the U.S. Still, certain economies are trying to push forward with re-openings. In Florida, a major virus hotspot, Disney World reopened. There’s much uncertainty as to how sustainable any re-openings will be. We also face the Fall and Winter without a vaccine for COVID-19.

Businesses are up against major hurdles in trying to manage their accounts receivable in such an uncertain environment. How do they move forward with confidence when their A/R isn’t operating as efficiently as it should? The answer is accounts receivable triaging.

A/R triaging is a management method that helps businesses get the most out of their accounts receivable. By prioritizing invoices and efficiently operating your A/R process, you increase your chances of collecting payments in a timely manner.

Below is a 4 step plan from Resolve to help ecommerce businesses manage their accounts receivable. It’s an outsourced strategy, which we’ll discuss more a little later. Why outsource your A/R? Because it isn’t a core component of your business. It is a back office process and one that you don’t need to run in-house for your business to be successful. In fact, moving your A/R outside of your business will free up resources. You’ll no longer have to worry about hiring people for your A/R team, dealing with late payments, and all of the labor that goes into keeping A/R going.

To get a glimpse into what outsource A/R looks like, here’s Resolve’s 4 step plan:

1. Offer net terms — easily extend net terms financing on your website using our net terms payment gateway.
2. Get more customers — buyers apply through a simple application and get approved for dedicated payment terms (net 30-60) within one business day.
3. Make sales — you receive more sales and your buyers receive personalized confirmation of their payment.
4. Get paid — after a purchase is placed, Resolve automatically transfers the funds to your bank account. We handle customer invoicing, billing, and collections.

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.