With inflation rates ballooning in the United States and a global energy crisis straining pocketbooks, many organizations are beginning to plan for the risk of a significant economic downturn. James Knightly, Chief International Economist at ING, has even gone so far as to state: “With supply conditions showing little sign of improvement….The recession threat is rising.”
Accounts receivable play a fundamental role in making a company recession-ready, as its operation is tied directly to cash flow. Unfortunately, many companies struggle to keep accounts current, making the credit-to-cash cycle erratic.
25% of all B2B payment transactions are received late.
These delays expose organizations to significant credit risk. In an uncertain economy, this sort of precarious situation can result in a severe negative impact, leaving organizations unable to pay their own debts or invest in the future.
The AR/Cash Flow Relationship
As a starting point, let’s explore the inverse relationship between accounts receivable and cash flow. Looking at the cash flow statement, an increase in AR can be identified by a decrease in cash flow. As a result, this shortage will limit the amount of funds available to repay creditors, and payout dividends and interest to investors.
Conversely, a decrease in AR helps cash flow, because the company has successfully converted credit purchases into an influx of funds.
The Risk of Manual Processes
Companies that rely on a traditional, manual accounts receivable process put themselves at risk for late payments and bad debt. For instance, paper checks are expensive and typically take between 5 -10 days to clear after being sent. That means that even if customers pay on time, it takes a while for it to convert to cash. And, as noted previously, 1 in 4 customers are paying their invoices late, exacerbating the delay.
Firms that rely on manual processes take 67% more time to follow up on late payments.
The longer it takes an organization to collect on an invoice, the less likely it becomes that they will ever recover the full amount, if at all. Studies have shown that an account 90 days past due has roughly a 70% chance of being paid. After another three months, this rate drops to 52.1%, and after one year the rate decreases to 22.8%. Not only that, but the value of the receivables decreases over time. After 90 days, they could be worth as little as 20% of their original value.
This inability to collect the full value of debt is a risk that no company can afford at a time when every penny is necessary to maintain financial stability. Not only could it impact an organization’s ability to pay its own debts, but it could also lead to an inability to meet other financial obligations, potentially disrupting the supply chain and ultimately leading to high workforce turnover.
Gaining Security Through Automation
Adopting an automation solution is a simple, common sense method of accelerating your cash flow and protecting your organization from bad debt.
An AR automation software allows you to send out invoices promptly, with regularly scheduled communications to keep the bill top-of-mind for customers. These emails also include a direct link to the self-service payment portal, meaning customers can log in to their account with a simple click and quickly make a payment.
The self-service portal is another vital piece when it comes to decreasing late payments. As good as your AR team may be, your customers really don’t want to spend any more time talking to them than is absolutely necessary. They want the ability to make payments at their own convenience. A payment portal offers that and more, allowing customers to easily raise disputes, review account information, and ask any questions they may have.
When questions or disputes are entered through the portal, they are automatically prioritized and sent to the appropriate team member for quick resolution, which helps decrease potential delays in payment.
Because an automation system communicates with your ERP and other back office systems, it also decreases manual data entry and transfer, decreasing the likelihood of errors that can lead to invoice disputes.
By removing friction points in the payment process, customers are more likely to pay on time, increasing your cash flow and keeping your organization financially stable.