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Effectively Forecasting and Managing Receivables

04.08.2020

The impacts of COVID-19 are hitting receivables for businesses particularly hard. Reports of customers postponing and cancelling orders are becoming routine. Many businesses are relaxing cancellation fees to maintain their customer base, but at a cash inflow cost to themselves. It’s still unknown whether those lost sales will ever be made up.  

Today, it’s critical to know what sales are pending payment and put together a model that allows different scenarios of receivables being paid on time or at all. This will allow clear decision making on where you can partner and offer relief and when that relief may create too much stress on your own business. It should also provide a path to resume business as normal and help modulate ramping back up.  

Sales are great and business is booming, but cash still feels tight. If that sounds familiar, then your business may have an untapped opportunity to improve cash flow. Receivables covers the process from time of sale, through sending the invoice to a customer, to collection and processing of the payment. 

Whether your business is B2B, B2C or a combination, forecasting receivables can be tough. The more customers you have, the more challenging it is to manage risk of nonpayment and to efficiently collect on time.  

Risks to managing receivables:  

  • Sending customer invoices is not fully automated 
  • Sales orders and contracts may not tie to item value 
  • Customer master data may not match contracts or the invoice 
  • Past due invoice collection doesn’t prioritize efforts 
  • Sales team’s incentives don’t line up with the company’s cash flow objectives 
  • Consumer credit card payment fraud risk 

In theory, forecasting receivables should be easier than forecasting payables. The business is in control of the invoice process and terms agreed upon. However, the customer takes control of the most critical step: paying the invoice. Improving visibility on receivables can have a big impact on your cash flow. The key business drivers that will enable faster collections and improve visibility are: 

  • Customer payment terms and term adherence 
  • Timely and accurate invoicing from the customer 

Managing customer payment terms 

Does your business have a standard payment term offered to customers? In some industries, terms are regulated based on commodity sold and the state that it is sold in. However, this is the exception rather than the rule.  

To set the best customer terms, a business needs to understand its priorities. Revenue, margin and cash flow may end up competing for top priority.  

  • Revenue First = May trade price and terms to close the sale 
  • Margin First = May forego sales and compromise on terms 
  • Cash Flow First = May result in discount being offered to incentivize lower terms 

In a best practice scenario, the sales team is aware of the priorities and balances all of them for the best business result. If cash flow is a focus area, then guidelines for discounting should be made clear to the sales team. <insert calculation graphic here> 

Setting the terms is the first step. Customers may still not pay on time. Monitoring compliance and prioritizing collection efforts can use the information gathered from this business driver. Key things to consider: 

  • Does the customer pay based on invoice date, ship date or receipt date? 
  • Does the customer have a scheduled payment run or do they release payments as needed? 
  • What payment type do they use (check, electronic funds transfer (EFT), etc.)? 

Once considering these factors, the forecast and priorities for collection will be more impactful. Less time is wasted following up on payments that may be a few days away. 

Timely and accurate invoicing 

Many operating systems will allow invoices to be automatically generated based on completion of a sales order. However, master data of how to send that information must be accurately maintained to ensure it is sent to the right place. Validating the price, taxes and fees are accurate will ensure the payment can be applied quickly. To control this process, consider: 

  • Automated invoice routing 
  • EFT  
  • Advanced Shipment Notifications (ASNs) 

Key takeaways 

  • A consistent sales forecast will ensure the cash forecast is also secure. 
  • Sales team incentives may help or hurt cash flow depending on what their objectives are. 
  • Understanding your customer base routine will give better insight into when to escalate a late payment. 
  • Timely and accurate invoice processing kicks off the receivable cash cycle. Therefore, timeliness and accuracy up front enables a seamless remainder of the process. 

For more information on forecasting and managing receivables to improve your business’s cash flow, contact Amy Julian, Director, Advisory Services, at ajulian@bswllc.com or 314.687.2314. 

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