Revive Your Cash Flow!
Five Common Situations that Squelch AR Performance
Imagine that the order-to-cash (O2C) process is a parade. Leading the charge is the sales and customer service teams that bring in the orders. That’s where most of the hoopla occurs. Following them is everybody involved in production, distribution and the delivery of services — the ranks that get the job done. Next comes billing, followed by collections cleaning up all the garbage left by everybody that has gone before. If you remember the Rocky and Bullwinkle cartoons, some seasons there was a parade during the closing credits. The collection role is a lot like that of the little janitor with the big mustache sweeping up behind the parade.
Although this is a bit whimsical, bare with me because there is a lot of truth to the analogy. Errors that happen during the sales process often create collection problems. For example, sales people have been known to tell customers things that never get relayed to the order processing or billing departments. All sorts of discrepancies arise related to customer purchase orders, especially when there is a verbal order followed by a physical PO. Quality control issues that slip through production and or arise during distribution are not usually discovered until after the invoice is billed — most likely by the collector. In addition, the credit function can cause the problem when a customer is granted more credit than they can handle, often resulting in a past due invoice collections must address.
Lacking sufficient quality control checkpoints, most of the errors that occur during the O2C process will not show up until after the receivable has been booked. That’s simply the nature of things. “Garbage in…garbage out” applies to business processes in general and the O2C process in particular just as well as to computations.
Is Your Cash Flow Getting the Job Done?
Because of the nature of the O2C process, cash flow generated by accounts receivable will tend to deteriorate over time if not given sufficient attention. Any change in your O2C process has the potential for unintended consequences. A new pricing schedule, employee, product, supplier or service provider can provide the catalyst. Entropy is real, and it requires a stronger opposing force to be overcome. That’s why vigilance is an ongoing requirement for anybody charged with accounts receivable (AR) or cash flow management.
If your AR is performing at a high level and your cash flow is insufficient, you will need to generate more revenues and/or cut costs. More capital, whether invested or borrowed is not going to solve the problem, and may even acerbate it, especially in today’s higher interest rate environment (remember unintended consequences and entropy).
More than likely, you’re not getting peak performance from your AR, and therefore your cash flow is being diminished. If that’s the case, you need to review your O2C process to identify the obstructions in your cash conversion cycle. As you can imagine from the porous nature of the O2C process, that could be a multitude of things. To help you focus on the real problems, this article will discuss five situations that are commonly at fault.
To continue reading and learn the top 5 situations that impede AR performance and cash flow, you’ll need to be a paid subscriber to Your Virtual Credit Manager…our standard subscription is only $5 per month or $49 annually.
Do you need help collecting past due receivables or understanding your customer portfolio risks? The experts at Your Virtual Credit Manager are currently offering 33 percent off our standard small business consulting rates.
Readers of Your Virtual Credit Manager can access sharply discounted business credit reports from D&B, Experian, or Equifax through our partner accredit.
Please share this newsletter with your small business customers . . . it just might help them collect faster and pay you sooner.