"AR" you ready? A Finance Guru’s Guide to Year-End

George Green | Thursday, Dec 8th 2022
AR you ready? A Finance Guru’s Guide to Year-End

Sarah-Jayne Martin is the Director of Financial Automation at Quadient. With over 20 years of experience in the finance industry, Sarah-Jayne (SJ) has worked as the Director of Order to Cash for several global firms. Today, her role is focused on supporting finance leaders, providing strategies and technology solutions that streamline processes, strengthen cash flow, and deliver improved experiences for employees and customers.

Why is year-end such a critical time for businesses?

SJ: To say year-end is critical for businesses is an understatement! It’s the endpoint that reveals whether all your efforts have failed or succeeded. Through year-end, you’ll discover the business decisions that served your company well and those that have hindered growth and require course correction for the future.

As the company’s revenue stream, AR professionals should be eager to compile the year-end report to assess the growth and sustainability of their business.

What are the top three items that finance leaders and teams should be focused on between now and the end of the year?

SJ: Firstly, they should focus on identifying risk in their portfolio. Do you have any customers with large balances that haven't been paying? After you’ve reconciled bank statements and payments, the fastest way to identify these accounts is by running an aging report. This report will reveal the accounts that are still collectible versus the ones that should be written off.

When I was a practitioner, my team started that process in October because we knew people may be on vacation and could then become disengaged from Thanksgiving until the New Year. However, that’s not to say it’s too late if you haven’t doubled down on your efforts yet. Your clients are likely closing out their year-end books as well so this can be an opportune time to collect past due invoices. You’d be surprised by how much money you can get into your business in the final hours.

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By the same token, your second priority should be to identify the balances that aren't going to be paid to make sure they’re written off by year-end. The goal is to avoid carrying debt with you into the new year so that you can start 2023 off with a clean slate. The IRS suggests writing off receivables at the end of the year if:

  • There’s proof of the obligation to pay you via a contract or signed agreement
  • The debt is part of your gross income
  • The debt is related to your offering of goods or services
  • The debt is worthless or you’re unable to collect the entirety of what’s owed to you

Thirdly, you should prioritize the continuation of your customer relationships. Gentle reminders such as sending holiday cards help keep you in your customers’ thoughts. You’ll want to make sure that your customers are still engaged and looking to make purchases. To that end, you have a responsibility to keep the sales team informed. Who are the customers that are reliable and engaged that we want to try and upsell to next year? Identifying these factors and starting processes early gives you a good runway for when January begins.

What are the top three pitfalls to avoid during the year-end process?

SJ: While communication is key to success, it can also be a potential pitfall if your sales team is not on the same page. No salesperson wants any of their balances written off; they may be on track to win a trip or other incentive and typically a write-off counts against their numbers. So, you're going to face a bit of a battle there. This means that you’ll want to make sure your sales team understands that the overarching goal is the trajectory of the company and any decisions made are in the interest of that. If a customer has habitually demonstrated poor payment behavior and neglected your business, you’ll want to explain that to sales when you make the decision to write-off a receivable. Through data analysis and clear communication, you can gain the confidence to write-off outstanding balances in time to resolve assets and liabilities for year-end.

The holiday season is notoriously known as a time for disengagement, both internally with your teams and externally with your clients. People go on vacation, and some employees are either overwhelmed, disinterested, or both! So, you need to focus on maintaining motivation within your team, despite all those distractions. Make sure that the collections engine is still churning, even though activities typically slow down. That may mean providing incentives to keep team members engaged. Gift cards are obviously well-received at this time of year. Consider allocating a small amount of budget to individual or team incentives to help your business mitigate the pre-holiday slump and finish the year on a high.

Finally, you need to remember that compiling your year-end data is just the first hurdle. Being able to speak with authority and justify your numbers is a whole different beast. You know that controllers and CFOs are going to ask you tough questions, so being able to hold your own in meetings is a must.

Make sure that your data is accurate and that you have a good handle on all your numbers, because you’re going to have to report on those. Articulating the year-end data to business leadership is a critical moment and can be fraught with pitfalls if you are not prepared. This is when it becomes clear if you understand your company’s AR processes and are well-versed in the financial decisions that were made throughout the year. It’s about really knowing your customer base, identifying what’s outstanding, and highlighting where the risks are. This will empower you to speak confidently as to where your business’ financial health is.

How do these steps set a company up for success in the new year?

SJ: Having that insight into the data helps you to make better business decisions in the new year. It gives you a time to reflect on the prior year, addressing points of concern or potential growth areas which you can target in the new year. These processes will simultaneously lower your risk and improve your profit. The new year is a time to reset, so it’s key to make sure that your business is in the best position possible for that.

Through historical data, you can identify where things were steady and where there were anomalies. Digging in further, you can see what those anomalies were and consider how you could have handled those instances better. This helps you to identify gaps in your process that you need to address when the new year starts.

For example, let’s ensure we have up-to-date invoicing details for customers. That sounds basic, but you’d be amazed by how many businesses waste time sending invoices to incorrect addresses and customers. At best, these invoices aren’t responded to because they haven’t reached anyone. At worst, you face frustrating your customers by demonstrating you don’t know their business well enough and then having to subsequently work with them to resolve the mistake.

What advice would you give to AR professionals who are navigating year-end for the first time? What should they prioritize?

SJ: Days Sales Outstanding (DSO) figures are the first numbers that any AR professional looks at when trying to resolve year-end data. DSO is a metric that’s used to gauge how fast your customers are paying you. In addition to this, they should look at write-offs, the volume of them, and the circumstances that perpetuated them. Perhaps your team didn’t conduct a thorough enough credit analysis when the customer was onboarded?

Being mindful of trends is also imperative. As a basic example, that means that when we have a seasonal product like flowers, we know that in February there’s going to be a significant spike in sales. Then, what usually happens a couple of months later is that AR spikes because all those invoices become due. So, how can we be proactive about those events to avoid a tumultuous up and down throughout the year? Finance teams — and businesses by extension — thrive on predictability and stability. Your tech stack should sit at the heart of your data and trend analysis. If you haven’t got a solution that enables you to track data easily, and in real-time, then you’ll want to consider how this can help your business when you move into the new year.

Any final Finance Guru guidance?

SJ: Year-end can be a daunting process, for both seasoned finance professionals and those who are resolving annual liabilities and assets for the very first time. The most important first step to take is to prioritize communication, as this is critical to making everything run smoothly.

Whether you have automated your AR for simpler data analysis and reconciliation, or you’re manually pulling figures from each department, you need to collaborate. And, after all the hard work, you’ll be able to sit back and look at your accurate year-end figures to then chart an even stronger course for 2023.

Good luck!