You’re on your way to more predictable cashflow
Let’s connect our software together to get started
The global pandemic has forced nationwide lockdowns and has brought the global economy under distress. Countries were forced to take unprecedented measures to slow down the spread of the contagion. Likewise, organizations had to resort to quick action to protect their customers, finances, suppliers, and employees.
McKinsey, the US-based management consulting firm, surveyed 1592 respondents across a range of companies and industries globally. The survey was conducted between 2 – 6 March 2020. 84% of those surveyed viewed the pandemic as a threat to the global economy. Several companies lost 75% of their annual profits in the first quarter of this year. Others had no other choice but to reduce costs by laying off staff and encouraging the remaining ones to work from home.
In such chaotic situations, the role of the CFO (Chief Financial Officer) is of critical importance. In the last few years, the role of the CFO has expanded a great deal. They are now looking beyond finance, accounting, and compliance, and are taking on bigger responsibilities such as strategic planning, business transformation, and company investments. CFOs are vital to the financial health of the organization and can help it tide over the current economic crisis caused by the unprecedented challenges we face in a world disrupted by the effects of the pandemic.
As per McKinsey, CFOs should take action on three fronts – immediate survival, stabilizing the business during the crisis, and guiding the recovery of the company once the situation has stabilised.
Here’s how a CFO could help their organization recover from the financial crisis caused by the pandemic:
The global pandemic has forced many companies to shut down, some temporarily and some permanently. The restricted cash flow has taken away the freedom from most customers to make discretionary purchases, and supply chains have been disrupted. The entire world has been in the grips of the pandemic and it is difficult to fathom the magnitude of the current crisis. It is thus necessary to optimize the cash reserve of the company for surviving these trying times.
A CFO would ideally take the following short term steps to ensure the immediate survival of their business during these difficult times:
Successful leaders do three things effectively – have their priorities right, work with the right people, and maintain the right relationships to get results. Taking stock of the current financial situation may help CFOs prioritize and further plan their strategies. To keep the business afloat, they would need to pay special heed to the cash flow as well as get their hands on any capital they can access. The current situation is stressful for many, which could likely increase the number of defaulters. Collecting payment from defaulting customers should be a priority as that could help improve the financial situation of the company. CFOs may consider other options too, like a line of credit or raising capital through joint ventures or divestments when the working capital is insufficient. They may also want to seek relief on debt covenants to consolidate the balance sheet. The current situation demands the real-time tracking of liquidity.
The global pandemic has forced many innovation plans to go on the backburner and CFOs have had to take on more strategic roles. The impact of the pandemic has been different for different locations in different geographies. CFOs now have to keep track of the impact in different locations and strategize accordingly. They could form a small task force within the business that could monitor the current conditions so that business decisions can be made accordingly. The pandemic could give rise to a range of scenarios and a CFO may need to take financial decisions accordingly. Every financial decision taken in real-time could have a profound effect on the future of the company.
The company’s primary focus during the pandemic is to preserve cash and use it carefully. It is, thus, important to keep the board of directors and investors abreast of the situations. Proactive communication on the part of the CFO can keep important stakeholders aware of the current situation and its effect on the company. Setting up a robust and detailed communication plan may also be necessary to keep the stakeholders aware of the liquidity situation and the steps taken to protect the business. A strong communication plan helps maintain the confidence of investors and other stakeholders regarding fast and resolute action taken as per the situation.
In the current situation, robust and effective planning is necessary to stabilize the company and ensure it continues to operate effectively. Making operational improvements, strengthening productivity, and reassessing the investment portfolio may be essential to stabilize and keep the company running optimally.
The CFO can help stabilize the business by:
To tackle the current situation, robust planning is necessary to support and improve productivity once the situation is back to normal. Along with the finance department, operational measures need to be put in place to support performance improvement. The CFO may encourage the development of newer products or services that help customers in need to bolster their loyalty and, in turn, increase revenue and the lifetime value of their customers. For instance, many companies are now utilizing alternative sales and delivery channels, including fast tracking their eCommerce plays and leveraging digital and technology channels.
In times of financial crisis, it becomes imperative to delve deep into the company balance sheet. Inventory reduction, refinancing of outstanding credit, accounts receivables and payables are aspects that demand special attention. A balance sheet cleanup can make the company more financially flexible while being focused on key metrics. CFOs play a vital role in optimizing the company’s investment portfolio by reviewing R&D and IT allocations. In some situations, it may be necessary to revisit the initial projected return on investments as it is most likely to change in the current situation. Higher-yielding projects or projects with shorter road maps to deployment may be given more attention, and more financial and human resources may be diverted to them.
The current economic situation requires the finance team to quicken its pace of forecasting and budgeting. The pandemic has not just affected the health and well-being of people globally but also the financial well-being of many companies. It is vital that the CFO receives updated business information so that he and the finance team can incorporate it into an integrated forecast. Collaborative tools may be used to manage and monitor key performance indicators. A real-time dashboard is also a good idea as it can help business leaders focus on the key metrics that can guide the organization’s operations in the coming months.
As the pandemic situation subsides, CFO are shifting their focus to helping the company recover. While the pre-recovery situation is a fight for survival, the post-pandemic scenario requires a plan for growth. Investment plans to diversify the company’s portfolio and implementing significant productivity measures can help the company grow after the pandemic is over.
To help the company recover, the CFO needs to take the following steps:
A crisis could often be an appropriate time to rethink or redesign parts of the business. Transformation may be the keyword here, as that’s what businesses would need to do in the post-pandemic world – transform. Business transformation may need adjustment of productivity targets and re-evaluation of performance metrics. CFOs are vital for business transformation and should review the entire company portfolio with a focus on helping each business unit reach its full potential. Transformational plans could significantly boost revenues or cut down costs helping the business recover and thrive.
During an economic crisis, uncertainty and decreasing valuations of companies could give rise to an optimal environment for mergers and acquisitions. The CFO may want to assess if mergers and acquisitions, or other avenues like strategic partnerships or SBU divestments that may provide a pathway to improve the company’s portfolio. History shows that resilient companies divested 1.5 times more than their non-resilient peers. Product, geography, or supply-chain acquisitions could hold a lot of promise during these troubling times. A strategic approach to mergers and acquisitions could improve a company’s portfolio.
During this pandemic, a huge chunk of the global workforce is working remotely to contain the spread of the pandemic. Working from home has never been so popular as it is now. More and more companies are looking for ways and means to improve the productivity of their staff working from home. CFOs may want to continue to support digitization as it can positively impact the finances of the company even after this crisis is over. Digital initiatives, like automation of various processes, and real-time forecasts, are critical for running the business smoothly. Embracing digitization will ensure informed decision-making, accurate reporting, and business continuity in the event of any future crisis.
The global pandemic has disrupted the global supply chain and has significantly impacted the return on investment almost overnight. The focus has shifted from efficiency to accounting for stability and resilience. CFOs need to shift their attention on digitizing and automating core business processes to minimize their exposure to external shocks and create resilience.
Many countries have now slowly begun to relax their lockdown directives and are supporting the re-opening of businesses. The CFO plays a significant role in the re-opening and needs to take steps to resume operations while keeping the trust and confidence among the customers intact.
As economies begin to reopen and return to a semblance of the pre-covid normalcy the need to plan for tactical and strategic initiatives that are responsive to customers’ needs and behaviours is critical. The CFO plays a significant role in the re-opening and needs to take steps to resume operations while keeping the trust and confidence among the customers intact. He can be instrumental in taking steps and precautions in making the workplace safe for both employees and customers.
Some of the necessary steps could be:
In these uncertain times, communication is vital. As much as it is important to have clear and frequent communications with key stakeholders, it is also crucial to have a line of communication open with employees. Business leaders must demonstrate empathy in these times as employees struggle with anxiety about their health and future.
CFOs can play a fundamental role in keeping the morale high of employees. Regular communication is essential wherein the CFO apprises the employees of the company regarding actions and plans to tackle the crisis. Effective communication dispels rumors, reduces distractions among employees, and keeps them motivated. CFOs need to consider the best case as well as the worst-case scenarios in mind when formulating strategies. No one knows how this global crisis will pan out; hence, they need to consider all situations keeping their stakeholders, suppliers, customers, and employees in mind.
In anticipation of a significant increase in the number of small businesses being put into external administration following the end or temporary measures extended until 31st December, the Australian Government has today announced major changes to come into effect 1st January 2020.
The reforms will allow businesses with liabilities of less than $1 million to restructure their debt, similar to the Chapter 11 bankruptcy model in the United States.
The previous “creditor in possession” model will be replaced with the “debtor in possession” model, where businesses can restructure their debts without giving up control to appointed administrators.
Click here to read the Aust Govt. Fact Sheet released today.
Credit risk management is important in good times, in slow and uncertain times with less protection it is even more critical for businesses.
Businesses need to consider:
Credit risk management is all about good processes, systems, and data. But it does not need to be difficult, or time-consuming. To see how you can implement an effective system by COB today watch the demo.
After what has already been a torrid year for Australia with bushfires and Covid 19, October 2020 looms with:
Make it easier for your customers to buy, and more importantly for your customers to pay, with ezyCollect’s Pay by Instalments, available now.
We all know that no matter what we go through, the economy always bounces back. It’s a matter of staying afloat during the storm, and then capitalising on the recovery.
We’ve seen the success of companies such as Sydney’s Afterpay, with a current market value of $21 billion (as at 14/9/2020) after only 6 years. People will still buy, if it’s easy for them to buy.
Your customers do still want to buy from you, and indeed need to keep buying from you to keep their business turning. It’s about making it as easy as possible for them to buy, especially in difficult times. And where they have choices in suppliers, they will obviously turn to the supplier who makes it easiest.
It’s about helping your customers through the tough times, whilst ensuring your own business does not suffer. And history shows us time and time again, that companies who survive the tough times, generally do very well when the market recovers.
You’re probably familiar with the personal credit score as a measure of a consumer’s ability to repay a loan. Likewise, the business credit score is a measure of a business’ credit health. When a business needs to borrow money, a creditor will assess the condition of the business’ credit status before issuing terms.
A business credit score is a number (or numbers) that indicate the creditworthiness of a business. A company’s credit score is calculated from commercial information—mostly financial information—available on its credit file. A business credit score tells creditors how likely a business is to pay its bills on time.
A business credit score is a numeric indicator that is amalgamated from detailed information available in business credit report.
If your payment terms to customers include trade credit, you’ll want to know upfront the likelihood that your customer will repay you on time. A business credit score provided by a credit reporting bureau will give you a credit assessment based on amalgamated market data.
Traditionally, suppliers seek trade references i.e. testimonials from other suppliers about the buyer’s payment behaviour. The risk with relying on trade references is that you’ll get a snapshot of healthy relationships. But what about the bigger picture?
The business credit score takes out the personal bias and presents you with data-driven analysis.
Different credit reporting bureaus present the business credit score in different ways. At ezyCollect, we offer the data from top credit reporting bureau, illion. illion’s credit scoring model provides two credit scores: a late payment risk score and a failure risk score. Two scores for the price of one!
illion’s late payment risk score predicts the likelihood of a company paying severely late (90+ days beyond terms in the next 12 months. The score range is 101- 799, where 101 represents the highest risk and 799 represents the lowest risk of delinquent payment.
Illion’s failure risk score predicts the likelihood that a business will seek legal relief from its creditors or cease operations leaving unpaid debts in the next 12 months. The score range is 1001-1999, where 1001 represents the highest risk and 1999 represents the lowest risk of delinquent payment.
The data used in the statistical analysis are mined from the credit bureau’s commercial database. Every bureau has its own credit score algorithm to calculate a credit score.
Key influencing factors in the illion business credit scores predicting late payment risk and business failure risk include:
Business failure risk scores are also influenced by company financial information, such as financial records lodged with the corporate regulator.
Each credit reporting bureau provides the business credit score differently and offers a range from minimal risk to severe risk. Generally, the higher the credit score, the healthier the credit rating.
As a general rule of thumb, suppliers give credit to companies that have a moderate to minimal credit risk score. They then continue to review and monitor the terms. As a customer’s credit score improves (average to minimal risk), suppliers may extend terms to nurture a healthy buyer relationship.
Paying creditors on time is the best thing that buyers can do to build a good business credit score.
Your business credit report is compiled by a credit reporting bureau from your business’ past and present credit activity. It considers your loans and other borrowings, as well as your repayment history on bills such as water and electricity. The corporate regulator—in Australia, it’s the Australian Securities and Investments Commission (ASIC)—also provides information on business compliance and company financial information. The courts provide information on any court actions and judgements.
The business credit report can be basic or comprehensive. Order a basic credit report for details on the business and its office holders, legal events that occurred in the past 60 months and court actions related to directors.
Order a comprehensive business credit report when you want to know more: historical ASIC data, Personal Property Securities Register (PPSR) and industry average risk scores.
Past payment performance is a key influence on the business credit score, so it’s important that a business pays its bills on time. Late payments on credit cards, utilities and supplier bills can negatively impact the business credit report and score.
Lenders don’t want to see that a business has maxed out the credit available to it. It’s better to have more credit available than used. That means a business should pay off its credit card balances on time, or increase its credit limit so the use ratio is lower, or decrease its credit card spending.
A business credit score can improve when there are positive trade reference attached to its credit file. Positive payment experiences are evidence of a business’ creditworthiness.
A business can check its credit report with any of the major credit reporting bureaus. Some services will offer one free check each year, otherwise there is usually a fee. A business can erase errors on the credit report by providing the bureau with up-to-date and accurate information.
Suppliers use business credit reports and scores to assess if a new customer is likely to pay their invoices on time. They may trade with high risk customers by accepting only cash on delivery, while offering low-risk customers extended credit limits and longer payment times.
How we do business has changed. Physical distance from co-workers and customers has transformed how we communicate and connect. Supply chains once buoyed by cash flowing through them are hurting. Your accounts receivable process, which counts on both communication and cash flow, has probably been tested in a COVID-19 world.
The question is, did it pass? And how will you transform your accounts receivable (AR) process for now and a post-pandemic future?
Here are some of the pivot points every accounts receivable manager needs to know and the next steps to take in the current B2B environment.
What accounts receivable managers need to know:
Your high costs of accounts receivable management can be directly attributed to the cost of doing labour-intensive manual tasks. Accounts receivable tasks such as sending email reminders, preparing monthly statements and sifting through spreadsheets are eating up time your staff could be investing in other revenue-generating activities. Unsuccessful collection attempts due to a leaky process have a zero return on investment.
That’s just your story. What about your customers? They don’t want to be wasting their labour on dealing with your complicated order-to-payment process. They’ll simply move on to the supplier that’s easy to deal with.
Automated accounts receivable solutions like ezyCollect do the groundwork for you: identifying when invoices become overdue, funneling invoices into a reminder schedule, taking care of your monthly statement run, accepting payments online and even thanking your customers for payment.
With the routine tasks running in the background, your team has more time to further reduce accounts receivable costs. Spend more time analysing your books for the debts at risk of being written-off; pick up the phone and save those unrealised sales before they slip into the land of the lost.
An accounts team working remotely is separated from each other and their usual work practices. It is now harder to share tasks and get visibility on day-by-day accounts receivable task management. Who is making the collection calls today? What did the customer promise to pay? How will you accept customer payments over the phone when you’re not in the office?
Just as your sales team is using your ERP or CRM solution to track the sales funnel, your accounts receivable team can keep close tabs on the payments funnel with a cloud-based debtor CRM.
To avoid the mess of spreadsheets and silos of information, your team can work from anywhere and check in with one shared accounts receivable data source. It eliminates confusion as it is the single source of truth for all overdues, customer communications, promises to pay, payment history, and tasks that are due.
Of course you should be concerned with your own cash flow. But now is the time to also express empathy and be your collaborative best with the rest of your supply chain. ‘We’re all in this together’, right? As your customers come under financial pressure, will you keep communicating as if nothing has happened, or will you shift your message and tone to directly address their current cash flow crisis? Will you be the thorn in their side demanding payment or the guide who helps them to continue to trade with you?
Businesses that emerge from COVID-19 with their customers intact will recover faster. You may now need to consider accepting part payments, offering buy now pay later, or accepting credit card payments as your customers look for responsible ways to extend their line of credit. If your customers want to continue to trade with you but need more options, how can your accounts service adapt to support your customer service?
What accounts receivable managers need to know:
A new customer who never pays you is literally more trouble than they’re worth. While it’s tempting to get more customers onto your books, if their cash doesn’t follow, it’s a useless exercise. Trade references have their place but they are time consuming and often biased. Your prospective customers arrive with an audit trail of past credit events and current credit activity.
Do you have eyes on every customer’s credit behaviour?
Add a step in your customer onboarding process to thoroughly assess a prospective customer’s credit rating before you issue a cent of credit. For minimal effort and as little as $5, you can get a basic credit report from ezyCollect’s Credit Insights service.
With your credit risk assessments done, adjust your payment terms to minimise your credit risk exposure. Some customers should be on cash on delivery terms. For good payers, you could consider extending more credit to foster more business.
You can even go deeper with day-by-day analysis of how promptly your customers are paying you and others. For example, ezyCollect’s automated credit insights service will track every customer’s payment time and send you risk management considerations.
Supply and demand has changed. The multi-billion dollar uptake in the JobKeeper and cash flow boost payments from the Australian Government proves that business revenue has taken a sizeable hit. However, not everyone is in the negative. Some of your customers will be innovating, even thriving. How is your team quickly adapting to the fluctuating volume of invoices and payment reminders per customer? Can you track who has got money to spend and are you actively nurturing them for more business?
Solidify valuable relationships by talking to customers and asking them how they are adapting their business now and for the future. Ask them what would make their payables experience with you better, then tell them how you intend to break down the barriers to paying you. Solving your busy customers’ problems makes you a valued supplier. Your permanent improvements will keep customers returning to do business with you.
In the April-June 2020 business quarter, the economic impact of the COVID-19 pandemic began to emerge. At ezyCollect we saw an interesting pattern in payment behaviour: an uptake in credit card payments and an increase in after-hours online payments. One in five payments were closed after normal business hours.
Do your payment methods support your customers to pay when and how they can?
To never miss a payment, you have to think digital. Every aspect of how we communicate, connect and transact each day has moved online. Have your payment methods followed? Have you adapted your payment methods to give your customers cashless convenience, access to credit, and the flexibility to pay you even if your business is closed for the day?
Working conditions and the market have changed rapidly. The Coronavirus pandemic isn’t over and even when it is, its legacy will remain. Both you and your customers are already adapting to a forced new reality. It may not be easy or even desirable to go back to the way things were.
In fact, accounts receivable managers who fought the tidal wave of uncertainty with robust cash recovery processes, careful and consistent communications with customers and insightful risk management will not want to go backwards. It’s onwards and upwards from here.
For more ideas on how to transform your accounts receivable process, ezyCollect offers no-obligation daily product tours.