Business Credit Application Template : What should your business include in a B2B Credit Application form?

Business Credit Application Template : What should your business include in a B2B Credit Application form?

Does your business offer B2B credit? Offering favorable and more flexible payment terms is in line with the industry standards.

“Buy now pay later” is a proven business model that allows companies to retain their competitive edge in a challenging market. Retailers and other businesses across the world are increasingly offering B2B trade credit and alternative payment options.

While offering credit gives your business multiple advantages, it is important to know how to mitigate the risks of delayed payments.

Why offer B2B credit?

Apart from allowing businesses to gain a competitive edge, offering credit is a great way to encourage B2B customer loyalty. Credit offers a convenient way for businesses and suppliers to make payments and shows that your business trusts and values them. This helps build a strong, long-term relationship with these customers.

When companies get credit extended on good terms from your business, it can encourage loyalty. These companies are more likely to prefer your business for their future requirements. If you offer more favorable B2B credit terms as compared to your competitors, you can draw more B2B customers towards you. In addition, you can solidify your competitive edge by offering trade credit to businesses that are not looking to take a business loan.

Your B2B customers gain more purchasing power as a result of your trade credit. This means they can afford to buy more of your services or products, leading to stronger sales volume, larger customer base and increased profits.

Clearly, offering business credit offers considerable competitive advantages for businesses.

Why do you need a business credit application template?

For growth-oriented businesses, offering credit is a proven way of scaling their client base and sales volume. Given the risks inherent in this approach, businesses need to carefully balance the potential for higher sales against the risk to their cash flow.

According to Illion‘s research data, payments in Australia are late by an average of 10.4 days, reflecting that Australian businesses receive their payments almost 11 days overdue. According to another estimate, payments are delayed by 26.4 days on average. With a 30-day credit term, this translates to a two-month payment delay.

A new survey reveals that businesses write off 5% of B2B sales based on trade credit as uncollectible. As per this survey, delayed B2B payments increased in 2020, with 54% of firms reporting past-due invoices.

This ‘delay,’ which leads to a constriction of cash flow, is the reason for the failure of so many small businesses. Small businesses in Australia are owed $26 million in unpaid invoices. Business owners spend an average of 12 days a year collecting their dues. To counter this, business owners clearly need strategies – such as better credit control, AR automation, integrated online payments, and the ability to review debtors’ risk profies.

Here are some risks businesses face when offering credit:

Risks of offering credit to B2B customers

  • Cash flow impact – The standard credit terms range from 7, 21 to 28 days. Waiting for payments can reduce your business’s cash flow, impacting your ability to purchase replacement or other products from suppliers. Businesses opt for debtor finance to manage this risk. Failure to service the debt can impact your credit rating while potentially risking bankruptcy.
  • Reduced profit margin – Credit sales can also impact your profit margin. While the impact is only felt in the P&L ( profit and loss) statement, businesses may fail to consider the impact when pricing their services and products.
  • Large debts – If your business is exposed to large transactions, unpaid debts create a huge dent in your financial health.

These issues can combine to increase the risk of business failure. Per an estimate, 90% of small businesses in Australia fail because of cash flow problems. In a report, the ombudsman of Australian Small Business and Family Enterprise highlighted that small businesses are owed $20,000 or more in late payments. About 14% are owed $100,000 or more as late payments.

Cash flow problems have ripple effects on all aspects of running your business, impacting your ability to pay your suppliers on time. This can prevent you from taking advantage of any early payment discounts while damaging your reputation.

Most businesses lack the resources required to chase down their payments. Given the day-to-day tasks of running the business, most businesses have very limited time to dedicate to chasing the payments they are owed.

Balancing these risks against the multiple advantages of offering credit requires a strategic approach. While conducting a credit check on your B2B customers, setting clear payment terms is vital. A comprehensive credit application form can help you capture crucial information that you can leverage to assess credit suitability.

Based on your assessment, you can specify different payment terms for various B2B customers. For instance, you can offer longer credit terms for reliable suppliers while asking upfront payment for those who habitually delay their payments. You can also set a credit limit which is the maximum credit amount your business will offer. Defining the credit limit helps ensure your accounts receivables are funded and protects your cash flow. Based on the credit history or payment history of B2B firms, you can choose to specify the credit limit for each customer.

A digital credit application form simplifies the process of applying for credit and getting approved while reducing errors in specifying credit terms.

Key business information needed to extend B2B credit

Contact Information – The mandatory field in the form captures vital contact details, including the business name, shipping and billing address, tax identification, the business owner’s contact information. The credit application form must include fields to capture:

  • the name of the business
  • landline number
  • mobile phone numbers
  • email addresses
  • business address
  • Accounts payable contact

Business details – Your credit application form needs to capture full business details to ensure you know whether you are dealing with a trust, sole trader, association, company or partnership. Make sure the form captures these specific details of the business:

  • Australian Business Number (ABN)
  • Australian Company Number (ACN) in case of a registered company
  • Registered business name
  • Names of directors
  • Registered business address.
  • Contact details and name of trustee in case of a trust
  • Length of time the business has been operating.

Financial information – This information is vital to assess the firm’s ability to pay you. Ensure the credit application form captures these details:

  • Bank details, including bank account name and BSB (Bank State Branch)
  • Bank location
  • Accountant’s details
  • Recent financial statement reviewed/audited by an accounting firm
  • Permission to carry out a credit check.
  • Debts and assets
  • Profit and Loss statement.

Trade references – The form should capture trade references from a minimum of three other suppliers and their contact details ( full business name, mobile number, ABN, and email address).

Directors’ Guarantees – Ensure the credit application requires individual directors of companies to provide a written guarantee that they will clear the debts in the event their company is not able to pay. In case the business goes into bankruptcy or liquidation, you can hold the directors responsible for the payment of outstanding debts. Your credit application form needs to capture contact details, such as email address, mobile number, and street address of directors.

Payment terms – Set the payment terms in the credit application form in direct, simple, and unambiguous language to avoid misunderstandings and disputes. These fields should specify

  • The limit of credit you provide
  • The period of credit; usually ranges from 7, 14, to 21 or 28 days of purchase.
  • Types of payment you accept such as cash, debit or credit card, cheque, online payments, BPAY, or EFTPOS
  • Late payment fee that applies beyond a standard credit term. This can range from 30 days to 60 days.

Terms and Conditions – This is a vital section in the credit application form that ensures your B2B customers have read and understood your terms and conditions. Your company’s credit team and legal teams can work together to form a credit policy and specify these terms. For instance, it can include that your company will perform a credit check and make a decision on extending credit after

  • checking the company’s registration with an ABN Lookup
  • contacting the referees to assess payment history
  • carrying out a credit check
  • obtaining a cash sales history
  • evaluating the business’s liabilities, assets, and debts
  • securing a guarantee.

This section can also include information on

  • how and by when you will inform the firm of your decision
  • that you reserve the right to decline credit
  • and chase debts in case of failure of payments.

If you decide to extend credit, ensure you specify the credit limit, default terms or the penalty, credit terms, and other conditions. You can also include a section on the collections methods you will use. This explains the actions your business will take if the firm fails to pay. Businesses typically will send an invoice initially, followed by reminders, and if this fails, they can take legal action and engage a collection agency to pursue payments.

Download the Credit Application Template

Offering B2B credit and ensuring you receive payments on time can be challenging without a streamlined process. Download the free online credit application template to make the process seamless and error-free.

You can also use our Credit Insights & Online Credit Application platform – try it out and get 3 free business credit scores

Get an online Credit Application template

Get business credit scores and a free online credit application template - give your customers a great onboarding experience and manage your risk

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The New Financial Year – Building & Refining Your Business Plan

The New Financial Year – Building & Refining Your Business Plan

The 1st of July has whizzed past, and we’re already a month into the new financial year. The end of a financial year is a busy time for all businesses. In today’s world, the start of the new financial year has been overshadowed by pandemic-related stresses and lockdowns in some parts of the world, and we’re still dealing with an operating environment that has a higher level of uncertainty. In times such as these, it’s even more critical to have a clear plan that helps us navigate these chaotic times and help us and our business teams to align on the key goals, objectives and critically, the vision that carries us forward into an optimistic future.

Keeping that in mind, it is now the right time to assess our business plans and preparations for the new financial year. What is it that you want to change in the new year? How can you be better prepared for the new financial year?

Here are a few ways you can make a strong start to the new financial year.

Get organized

For starters, take a good look at your business operations. If you have tasks piling up or paperwork getting lost, you need to organize your business properly. By having better systems in place and automating low effort high impact tasks will help your teams punch way above their weight and produce better business results.

Being organized can also free up precious minutes helping you do more in the same period. Instead of trying to locate information in an endless ocean of paperwork, consider investing in a digital filing system. There are several digital document management systems available in the market. These can help you streamline and automate manual processes of collecting and retrieving information. A document management system can also keep your paperwork from going missing. Missing documents can create serious legal repercussions, especially if your business undergoes an audit.

Digitizing documents can also increase productivity and employee satisfaction at the workplace. A major portion of work time is spent in data management and record-keeping. Going paperless can save a lot of time and increase efficiency. Document management systems also provide quick, easy, and efficient access to information. You can customize the way you file your documents. It also makes it easier to prioritize information that you need regular access to. Many document management systems are cloud-enabled which means that you can access all information even when off-site. You no longer need to carry data physically, and you can efficiently work remotely.

Organizing your paperwork is not enough. You should also focus on organizing your time. Effective time management helps you focus better on your goals and gain perspective on your priorities. Figure out a system that keeps you on track. Many people use planners and digital alerts on their devices. You should consider using a system that works for you.

If your business is not well-organized, it could also impact your revenue and customer satisfaction. For instance, your customers may not receive their orders on time if you have a disorganized order processing system.

An unorganized workplace can also take an emotional toll. It can cause you, your employees, and even your customers to feel stressed and overwhelmed. Sorting through unorganized paperwork or not knowing where to look for information can create a stressful workplace. Implementing a solid organization system can greatly reduce the stress at the workplace and allow you more time to enjoy life outside work.

Identify and resolve operational problems

In the days leading up to the financial new year, try to identify your operation problem areas. Are there any problems that keep cropping up again and again in your business? An operational problem can manifest in many ways. It could be a temporary setback, interruption in production, or simply wasted efforts.

The first step is to be aware that a problem exists and use this opportunity to improve your business processes. Once you have identified an issue, you may quickly implement a quick fix. However, understanding the root causes of a problem can help you find the right solution that has long-term sustainability.

The market is inundated with software, apps, and platforms that help businesses address common pain points. For instance, if you face issues with cashflow forecasting or accounts receivables every month, consider investing in accounting software addons for your instance of XERO or MYOB or SAGE or Netsuite. Accounts receivables automation is not only about chasing payments. It also involves reconciling payments back into your ERP, debtor management and integrating a payment portal to minimise the time it takes for a payment to hit your bank account. Investing in the right app for your existing accounting software can automate your AR process, ensuring that there are no cashflow impacts due to growing debtor days.

A business always has multiple processes and tasks. Seek out the processes that are the most time-consuming or inefficient. Are there any tasks that are slowing your business down? Understanding how a process works can provide valuable insight on how to reduce inefficiencies. Try to eliminate steps in the process that add no value. If there are bottlenecks in the process, you may want to consider balancing the workload. More complex problems may need to be systematically analyzed to evaluate machine, methods, labor, and the physical environment.

After you have identified the root cause of a problem, you should look for a solution. Sometimes the solution could be as simple as rearranging the workplace. In others, you may need to invest in a particular solution to prevent the problem from occurring again and again. It is always wise to create an action plan for implementing the solution. Ensure that you monitor progress so that it can be applied across your business.

If you are considering investing in any tools or solutions, you can seek advice from other business owners. They would be able to provide first-hand reviews, helping you narrow down the right solution for your business.

Ready yourself for new changes

The modern business landscape is changing at an incredible rate. New innovations are reshaping entire industries and market conditions change as consumers evolve and grow. Legislative changes can also bring about several unprecedented changes in the work environment of a business.

While it may be daunting to undertake new ways of business operations, it is often for the better. In particular, legislative changes usually come into effect for good reasons. Instead of resisting change, you can save both time and money by working in tandem with news laws and regulations. Consider changing your workflows or updating your processes as needed. These changes could just be the catalyst needed to transform outdated business processes and user into new, novel thinking. The more you stay on top of the changing business landscape, the better your business would become in navigating turbulent periods.

Sometimes, it may be difficult for you to understand how new legislative changes may impact your business. In such situations, it is wise to seek advice and information from outside the organization. You can look for legal counsel or market and industry experts to make the transition easier for your business. Having the right information can help you implement the best business solutions and communicate changes in your organization in the best possible manner.

Businesses should act swiftly when legislative changes are announced and not wait until they come into effect. Being unprepared can lead to non-compliance, which in turn, could put your business in legal trouble. By putting new systems or procedures in place you can ensure that your business prevents any delays in normal operations. You also get sufficient time to educate or train your employees on the new changes. By making your employees aware of the upcoming changes as early as possible, you ensure better compliance with the new laws.

Change is inevitable, especially in business. When you and your staff become comfortable with change, you can help your business adapt quickly and easily to the new changes.

Create a strong, connected workforce

Developing engagement in the workforce is essential to long-term business success. Employees’ attitudes towards work could significantly impact the success of a company. It is in your best interest to encourage positive employee engagement at the workplace.

Where do you begin? Connectedness is a critical marker of employee engagement. A more connected workplace reflects a better organizational culture, which leads to more satisfied employees, greater teamwork, and less employee turnover.

The first step in building a connected workforce is to ensure that you value your people and lead them through a shared vision. Irrespective of their position or job title in your organization, every employee’s contribution matters. Your staff is likely to be more motivated and productive if are able to value their contribution. Beyond routine tasks, your staff needs to feel that what they are doing impacts a larger whole. Many employees are still working remotely, and motivation can significantly enhance their productivity.

Having a connected team helps workers stay aligned with the strategic priorities of your business. As a result, you get coordinated teamwork, making your business more agile. Business agility is extremely important in the fast-paced, evolving business landscape. It helps you adjust to market changes and internal changes with the same ease. Business agility allows your business to innovate and deliver more effectively, turning business disruptions into a competitive advantage.

The next step is to determine if your employees have the necessary tools and resources to get better at their job. You may want to consider investing in research and technology tools that help your staff keep up with the changing workplace. This will keep your employees connected and also give them the tools and learning opportunities to maximize employee engagement and retention.

Developing workplace connectedness is an ongoing process, and there is no single solution that suits all businesses. However, effective communication and regularly checking in with your employees can be the starting point. Employee surveys, celebrations, company updates, or getting the entire workforce at one place for a leadership address are some options you can explore.

If many of your employees will be working from home in the new financial year, consider creating an online reward and recognition culture. You may consider investing in employee engagement software to boost engagement and foster connection within your teams.

Find your purpose

One of the critical aspects of being a business owner is to be able to articulate how your products or services add value to people’s lives. When you provide the “why” of your business story, it allows your employees and customers to connect with you on a personal level.

Figuring out the purpose or the “why” requires asking the hard questions. Some questions that can help you understand the purpose of your business are:

  • What is the inspiration behind your business idea?
  • What is interesting about your founding story?
  • What is the USP of your business?
  • What problem is your business trying to address?
  • Why does your company exist?
  • Does your business support a specific cause?
  • What are your beliefs, personally and professionally?

In the 2009 Tedx Talks, author Simon Sinek introduced the “Golden Circle.” According to this concept, there are 3 layers to your business story:

  1. the What
  2. the How
  3. the Why

What

Every organization, big or small, know “what” they do. These are products they sell or services they provide.

How

Some organizations know “how” they do it. These include the things that make them unique or makes them stand apart from their competitors.

Why

Very few organizations are aware of “why” they do it. Making money is a result of what they do, it is not the primary purpose. Your business purpose is why your business exists in the first place. It is something that your business strives for beyond selling more products or services.

In this day and age, your brand needs more than a USP to stand out. Why? The reason is that there will always be companies who will claim to do it better, cheaper, or faster. Merely telling your customers why your product is better than your competition is not enough. Your brand needs a purpose. Your business purpose is the soul of your organization, something that your brand stands for.

A business purpose gets to the core of why a business does what it does. It helps guide business decisions by creating a framework that allows your company to achieve its mission and vision. Laying out your business purpose can help guide your business into the future.

Set a BHAG

BHAG or Big, Hairy, Audacious Goal is a term coined by Jerry Porras and Jim Collins in their book Built to Last: Successful Habits of Visionary Companies. BHAG is a long-term goal for your business, something that you hope to achieve in the next 10 to 25 years. This goal is guided by the core values of your company and your business purpose.

However, BHAG is so much more than just a goal. It is an audacious challenge, something that may sometimes feel like it is impossible to achieve. The biggest upside to having a BHAG is that gets you out of thinking too small. Setting a long-term goal that is audacious also creates a sense of urgency. However, your BHAG should be aligned with your company’s underlying strategy and everyone on your team should be on board with it.

Are you confused if your business decision will benefit your company? Are you confused about which direction to head towards? All you need to ask yourself is whether it will get you closer to your BHAG.

Your BHAG will also influence your recruitment strategies as you only want the best people to achieve this audacious goal. This clear goal will also help attract the right people to your company who would love to be a part of realizing this goal.

The most important reason you need a BHAG is that it transforms you into an amazing, visionary company. A good BHAG is audacious, so big that it may not be possible to achieve. If you feel that you are capable of achieving 100% of your BHAG, then it is not audacious enough. Only if you aim for the stars can you land on the moon.

The new financial year is the perfect time to develop your BHAG. You should reassess your business ambitions and start introducing changes that align with your unique BHAG.

Use OKRs

You have your BHAG, but how do you achieve it? For starters, you need to break down your goal into actionable steps. This is where you need OKR.

OKR (Objectives and Key Results) is a goal system that helps your organization define its goals and track the outcome.

The concept of OKR was created by Andy Grove but it was made popular by John Doerr, one of the earliest investors of Google. Besides Google, other companies like Twitter, LinkedIn, Spotify, and Uber also use OKR.

The OKR formula consists of two components:

  • What you want your business to accomplish?
  • How are you going to get it done?

With OKR, your goal is not just what you want to achieve but you must also include a way to measure achievement. OKR must not be confused with KPI (Key Performance Indicators). KPIs measure the health of a business initiative but are not goal-oriented by nature. It is possible to use both in your business, but you should be clear about the difference between the two. OKR is tied to business goals and objectives while KPI is tied to an employee’s day-to-day work.

OKRs comprise three to five high-level objectives, with three to five measurable outcomes for each objective. After you have established your objectives you can track the progress of each key result individually. Your key results should focus on outcomes related to business priorities.

The OKR goal-setting framework requires you to look at business improvement with a new perspective. The process starts with leadership setting audacious objectives for the company, prioritizing areas that must be improved. Functional teams then write their own objectives and key outcomes to contribute to one or multiple objectives.

Team OKRs must be aligned with the company’s mission. It should focus on business improvements that a department would deliver in a specified period. When you develop a result-oriented focus in the whole team, it helps team members prioritize their routine tasks. They also get a better understanding of how their work can play a major role in achieving organizational goals.

In the upcoming financial year, setting the right OKR and then tracking your progress consistently can help you think about ways to improve your business operations to achieve your lofty goals.

Review and update your strategic plan

All businesses need careful planning to achieve success. Growing a business means making several decisions along the way. Unfortunately, not every decision proves right and there may be a few mistakes along the way. Use the last remaining days of the current financial year to review the ups and downs of the year gone by. Review the current financial year to figure out what could have been done better and how you are going to address them in the new year.

One of the most common New Year’s resolution that millions of people make each year is to “lose weight.” Maybe, it’s time for your organization to lose weight as well in the new financial year. It is time for your business to become leaner and more agile.

Are your employees wasting precious time doing mundane tasks? Can they use this time to do more meaningful, productive work? If you answered yes, then you should consider automating your business processes. Business process automation is the best possible way to make your organization lose the unwanted weight and become leaner and more efficient.

In manually executed business processes, there is always a significant wastage of resources. With business process automation you can minimize operations cost, increasing your profit margins. Automation ensures that wastage is eliminated and resources are optimally used. There are several business processes that can be automated, saving time and effort. These include account receivables, customer support, onboarding, help desk support, and many more.

You should also evaluate your business’s current strategies to see if they are aligned with your short and long-term goals. You can do a SWOT (Strengths, Weaknesses, Opportunities, and Threats) analysis to understand what you are doing well, address what you are lacking, minimize risks, and plan for success. A SWOT analysis can help you evaluate where your company stands in a competitive market. You can also determine what steps you need to take for further strategic planning, helping you draw a future roadmap for the company.

SWOT is an important tool for assessing the health of your organization. It allows you to identify not only where your company stands, but also where you need to improve. This gives you the ability to be a proactive player in the market while remaining competitive. Using SWOT can help you review and update your strategic plan for the new year to do things differently.

Build a strong relationship with your existing client base

Relationships take time and effort to build and maintain and the same is true for customer relationships. Whether you respond to emails, answer queries, or reply to social media comments, keeping communication channels open can make all the difference with how customers engage with you. It also impacts your ability to build relationships with them. Once you have established a relationship with your existing client base, it is crucial to maintain and improve upon it. It helps ensure that you stay at the forefront of your customer’s minds and your brand is also cemented as their first preference for a product or service.

Your customers purchase and use your product or service. As such, they will have a unique insight and will often see things that can be overlooked by your own team. This unique insight enables your customers to be incredible when it comes to feedback. By utilising the feedback you get tailored advice to your product or service. You will also find that customers become more invested in your success. Customer feedback helps you customize your products and services to the specific needs of your customers. You can ensure that you provide the best solutions to their problems. The better your offerings meet their needs, the more your business will grow.

Organizations that develop strong relationships with their customers, create loyal clients, positive word of mouth and increased sales. The higher the level of customer engagement with your company, the higher the value your customer receives, and the better the relationship.

Optimising your CRM (Customer Relationship Management) could also help you identify potential sources of efficiency and growth in your business. You might consider investing in upgrading your existing one in the new financial year. Well implemented CRM software helps you better understand your customers in the way the platform organizes and displays your customer’s data. The better you know your customers, the stronger the relationship you can create with them. CRM platforms help you with better messaging and outreach, most of which you can automate, helping you offer better, more efficient customer service. Furthermore, it allows your teams to collaborate more easily and reduce siloes.

Derisk your business cashflow

Chasing after payments and debtors is something that’s not very high on any business owner’s list of favorite things. One of your business goals in the new financial year should be to reduce the risk in your business cashflow.

Whether your goal is to be economically secure and stable or to maximise your business value, many business owners, and people generally, are looking for ways to reduce their reliance on a few major customers or products. In the early stages of a new business, the founder usually takes on many tasks himself. As the business grows over time, the goal is to delegate secondary tasks one by one to others. Doing so helps founders focus on the 20% of tasks that will generate 80% of the results to scale the company.

How do you derisk your business cashflow and find alternate source of growth? You can do so by identifying the most likely potential sources of new business for your business based on your existing strengths and weaknesses or by applying portfolio analysis to your existing business

This helps you identify the most likely sources of growth:

  • New customers
  • New markets
  • New products
  • New partnerships
  • Long term deals with your biggest customers
  • Long term deals with allied businesses

When you have derisked your main source of business & cashflow by adding or prioritising new opportunities with high growth potential than your business can be ready to start the new year with even greater optimism with a potential to exceed all your goals.

Conclusion

The start of a financial year is without a doubt a stressful time for business owners. However, it also offers a golden opportunity to assess how you can run your business more efficiently in the new year. Use this time to review your processes and take measures to improve your business. You will be surprised at how small changes add up in the long run.

 

A Guide to Optimizing Cash Flow & Improving the Order To Cash Cycle

A Guide to Optimizing Cash Flow & Improving the Order To Cash Cycle

Managing cash flow can be challenging even during the best of times for many businesses. The COVID-19 pandemic has added several layers of complexity in terms of managing cash flow. While timely strategies on inventory management and cost-cutting help, available data shows money often gets tied up in accounts receivables. Prioritizing accounts receivables (AR) management is the key to optimizing cash flow.

As change agents, Chief Financial Officers play a crucial role in helping their firms navigate the ongoing economic challenges. By investing in the automation of AR, CFOs can help their firms optimize working capital and stay future-ready.

What are accounts receivables?

Simply put, accounts receivable is the money that is due, and as yet unreceived by a business from its customers. Also known as bills receivable or trade receivables, accounts receivables denote that the business has extended credit to its customers for the services or products sold. The business is entitled to receive the amount in the defined timeframe.

For instance, Max Agency sold goods to National Traders on the 2nd of June, 2020 with the goods being worth $80,000. Max Agency offered a credit period of 20 days. From the 2nd of June till the time National Traders pays the bill, $80,000 is considered to be accounts receivables.

The amount yet to be received from customers is reflected in the ‘current asset’ column in the balance sheet.

The Accounts Receivable process

While each business has its own accounts receivables process, most companies adopt these key steps:

  • Establishing credit practices
  • Invoicing customers according to the credit policy
  • Capturing due date for payments
  • Setting up a collection schedule
  • Sending reminders for pending bills
  • Tracking received payment
  • Adjusting the receivables after receiving payment

How do accounts receivables impact working capital?

Net Working Capital or NWC of a company is the difference between its current assets (accounts receivables, inventory, and cash) and its current liabilities (accounts payable). The working capital is a measure of a business’s liquidity, financial health, and operational efficiency. A positive and sustainable working capital enables the company to improve liquidity, expand its operations, fund current operations and maintain profitability. Positive cash flow also ensures the company is able to respond to and navigate through challenging economic conditions.

PwC’s global analysis shows that while working capital is the key value driver, $1.4 Trillion is tied up in balance sheets.

Historically, companies have focused on the three strategic components of the working capital to improve liquidity. These include inventory management, cost-cutting, and lengthening accounts payable processes. However, accounts receivables (AR), typically the largest component on the balance sheet, has been viewed as an administrative concern rather than a strategic priority.

Recent data shows that accounts receivables are the key area where money becomes tied up. Delayed payments impact businesses across sectors severely while impacting working capital and cash flow.

  • U.S. businesses are owed $3.1 trillion on any given day in accounts receivables.
  • Businesses lose 51.9 percent of the value of their receivables when the payments are delayed beyond 90 days
  • Firms write off anywhere from 1.5 to 5 percent of AR as bad debt.
  • In 2019, 39 percent of invoices were paid late as against 43 percent in 2018
  • The average value of delayed invoices was $48,542, in 2019.

Late payment severely impacts almost all key sectors including manufacturing, professional services, and retailers. According to a Dun & Bradstreet report from 2020, 10 percent of the aging dollars of 45 industry segments were 90+ days past the due date. Among the top industries getting paid severely late were retail auto and home supplies, publishing, frozen goods, general groceries, manufacturing, medical equipment, and computer programming.

Management of accounts receivables is critical to ensuring a positive workflow capital and liquidity. This entails putting in place a credit management or accounts receivables management system that optimizes AR and enhances cash flow.

Accounts receivable automation is a smart system that helps in building, improving, and sustaining better relationships with customers. The unprecedented challenges posed by recent global events such as the pandemic, political turmoil, and turbulent trade environment, further underscore the importance of an effective credit management system.

However, a recent study from Credit Research Foundation shows that incorrect invoices, delays in sending them, and other administrative problems are behind 61 percent of late payments. Many companies continue to rely on legacy systems or outdated manual processes to manage AR.

  • 69 percent of small businesses rely on spreadsheets to track invoices.
  • A 2020 study shows that almost all financial department professionals input some billing or invoice information manually.

This contributes to disputes, late payments, and errors as per a survey of 300 financial managers. 25 percent of respondents stated manual payment methods were the main invoice-payment method used by customers.

The consequences of poor accounts receivables management extend to multiple areas:

  • Firms that use manual processes spend 30 percent of their time gathering information about customers and manual entries. This leaves them with less time to communicate with customers regarding the payment.
  • Physical invoices are not only time-consuming but are expensive when processed manually.
    • A 2019 study shows it takes up to 6 days on average to process a physical invoice while the per invoice cost ranges from $16 to $22.
  • Poor productivity
  • Efficiency gaps
  • Manual processes resulting in too much time spent in updating spreadsheets, searching for customer data, correcting data errors, among other non-value-adding tasks
  • Missing documents
  • Incorrect address, wrong data, and invoices getting lost
  • Lack of priority on high-risk accounts
  • Outdated or incorrect information

The COVID-19 pandemic has made manual AR processes defunct. While the health crisis has given rise to great uncertainty, it also presents a window of opportunity for CFOs (Chief Financial Officers). Finance professionals are poised to play a critical role in transforming the future of their firms by adopting agile thinking, systems, and processes.

The evolving role of CFOs

An Ernst & Young survey reveals that 86 percent of CFOs agree that they need to focus on protecting enterprise value in the current time while enabling future growth. An equal percentage of CFOs believe they need to balance new mandates along with their traditional responsibilities. 69 percent of finance professionals state they are witnessing a fundamental change in their roles. The need of the hour is to think differently and digitally transform financial functions. Apart from being agile and flexible, CFOs need to find ways to gain deeper insights into their customers who are at the most risk and hold the highest value.

Innovative technologies and automation are emerging as the core components of finance functions. A survey shows that most financial decision-makers expect automation to offer a strong ROI (return on investment) for their firm. B2B automation, according to 84% of respondents, could reduce errors while 81% state it could reduce costs.

Artificial intelligence and automation, according to 72 percent of CEOs surveyed in the UK, will significantly impact the way business is done over the next five years. To optimize the working capital, CEOs and CFOs must focus on harnessing these technologies. Studies show firms that use an automated accounts receivable process spend just 6 percent of their time gathering information while 62 percent of the time is spent communicating with customers.

Accounts receivables automation helps the firm manage AR more effectively, leading to predictable cash flow. Positive working capital empowers firms to plan, grow and invest even during challenging times. Intelligent automation has emerged as the most valuable tool for CFOs to optimize working capital and AR management.

Achieving cash excellence amidst the pandemic will entail establishing a cash-centric culture across people, processes, and structure.

CFOs and CEOs must lead from the top to establish a robust cash culture and making cash a priority. Companies that have a positive cash flow are the ones who regularly communicate the importance of cash to their employees. This needs to be done not only to strengthen resilience during challenging times but also to create value. CFOs of successful companies signal that capital efficiency metrics such as Cash Conversion Cycle and positive Net Working Capital are as important as profit.

In terms of structure, leaders need to establish clear accountabilities and regular cadence. For instance, a family-owned company established a war room that focused on hour-long meetings on a daily basis chaired by their CFO. The war room reviewed daily cash balances while identifying opportunities to improve cash flow rapidly. Within eight weeks, the firm had cash savings while reducing its accounts payables.

A smart and streamlined cash-reporting system that is accessible to relevant stakeholders across the organization is the third critical component that CFOs need to focus on. Digital tools and automated systems can eliminate repetitive tasks involved in AR, making the process efficient and results-driven.

The benefits of automating AR

Automation reduces the number of days required to process invoices to 2.9 days with the per invoice cost being $2.18. For a firm that processes invoices in thousands per day, this translates to huge savings. Not surprisingly, 80 percent of accounting executives state AI offers a competitive advantage while an equal percentage believe it enhances productivity. Depending on the size of the firm, a company can save up to $16 per invoice through automation.

Automation and AI are set to be game-changers when it comes to cash flow management. The possibilities include:

  • Data analytics helps convert information into actionable insight and focused action.
  • Offering immersive visualization of cash flow and its importance across the organization to build awareness.
  • Predictive analytics to optimize the efficiency of AR/payment collection processes.
  • Drone technology to accelerate inventory count and management.
  • Accounts automation to remove manual back-office processes.
  • AI algorithms to flag bad debts and identify high-risk/high-value customers.

The benefits of AR automation are diverse:

Streamlined invoices: Manual processing of invoices entails extracting data and manually entering it in a PDF or Word doc and mailing the customer. The customer then has to review and approve it before making the payment. These tasks are not only tedious but are prone to disorganization and data entry errors that can have serious consequences. With easy integration to XERO and MYOB, AR automation streamlines invoices.

Faster payments: With AR automation, invoices are created accurately while you can send them to the right customer automatically and digitally. Automated reminders can help speed up invoice approvals that help remove lag time in sending invoices.

Automating invoices will ensure the right customer receives them at the right time, eliminating delays. With the automated system handling invoice processing, your teams can focus on communicating with customers. Invoices are immediately available for your customers to review, which helps improve the turnaround time for payments.

Focus on strategic tasks: Automating AR functions frees up resources that can then be channeled towards strategic tasks and higher-level financial tasks.

Save money: Automation helps reduce costs by not only minimizing the time needed for processing an invoice but by removing the need for creating dedicated storage space for paper documents. While the average cost of a manual invoice is $16, automation reduces the cost to $2 per invoice.

Central repository: With a central repository of data, automation of AR tracks, measures and identifies productivity of teams across the firm. Getting accurate data on the productivity of any given year or month helps you plan ahead for the future.

Improved customer experience: An AR Automation Report highlighted that for 31 percent of respondents, the biggest benefit related to fewer customer inquiries on misplaced invoices. With automation taking care of manual tasks, you can optimize the customer experience across multiple touchpoints. This includes transparent communication on pricing, approval and payment timelines, ongoing support, and transaction expectations. By ensuring the invoice and payment process is simple, fast, accurate, and hassle-free, your firm can optimize customer service. This, in turn, helps your customers choose your firm again in the future.

A comprehensive AR automation software integrates seamlessly with your firm’s ERP system and streamlines coordination and workflow. With up-to-date, accurate, and real-time insights on accounts receivable, automation empowers firms to make informed decisions on extending/withholding credit, collecting cash, and optimizing working capital.

 

Budget 2021 – What Does It Hold for SMEs?

Budget 2021 – What Does It Hold for SMEs?

Budget 2021 is centered around securing Australia’s economic revival. While businesses dependent on the opening up of the international borders will still face challenges, this budget has provisions that will benefit other small companies. It is also expected to support business investments as well as household expenditure.

With a major focus on funding the digitisation of businesses and continuing with some provisions from the previous year’s budget, more businesses are likely to move towards a digital economy. In fact, a survey conducted by Xero reported 26% of small business owners saying they intended to further digitise their business if the provisions were implemented.

The three major announcements for SMEs in this budget are:

  1. The Digital Economy Strategy will be funded with $1.2 billion.
  2. The Low and Middle Income Tax Offset (LMITO) will be extended for FY 2021-22, the Instant Asset Write-off provisions will be extended till June 2023, and the Loss Carry-back provision will be extended till FY 2022-23.
  3. The time companies spend on ensuring compliance with regulations will be reduced by using technology with the Deregulation Agenda.

The digital boost

Since 2020, many SMEs have been moving towards digitising their business as trade restrictions were imposed worldwide. To continue this trend of delivering productivity benefits, budget 2021 includes various benefits as part of the Digital Economy strategy, such as:

  • Digitization support to SMEs worth $12.7 million – additional funding to be provided for the Digital Solutions program by the Australian Small Business Advisory Service (ASBAS) to provide advice to small businesses to help them go digital.
  • E-invoicing support worth $15.3 million – the Treasury expects e-invoicing to deliver up to $28.2 billion in profits over the next decade, and the government will fund it.
  • Funding for cybersecurity, safety, and trust worth $55.1 million – investments will be made in the security infrastructure to boost businesses’ confidence in digital systems.
  • AI network support worth $53.8 million – investments will be made in a network of four new Artificial Intelligence Centers, which will be directed by CSIRO Data 61, which will have the potential to boost productivity through the encouraged use of transformative AI technologies.

Another one of Xero’s reports highlighted the benefits of the growing digitisation of businesses. The report enunciated that small businesses that had five or more apps integrated with their Xero accounts had fewer job losses during the peak of April 2020 (14.8% y/y compared to 18.4% with no apps). These businesses have also made a stronger recovery (-1.8% y/y in December 2020 compared to -5.1% y/y with no apps).

Cutting red tape

Budget 2021 includes a plan to reduce red tape across various industries and small businesses worth $134.6 million over four years. Some non-industry-specific initiatives are:

  • Funding worth $10 million for Modern Awards Pay database – the project aims at making it easier for small businesses to pay their staff correctly.
  • Funding worth $11 million for the mutual recognition of state-based licenses – the project aims to fortify the adoption of the Automatic Mutual Recognition for occupational licenses. It has the potential to bring in economic activity worth $2.4 billion over the next ten years.
  • Funding worth $10 million of the digitisation of business documentation – the initiative will enable the execution of electronic documentation, which could potentially bring benefits worth up to $400 million per annum to small businesses.

In addition to this, this year’s budget also includes provisions for skill enhancement and apprenticeships.

Skill-building and apprenticeship funding

Funding will be provided for the following initiatives:

  • Funding worth $500 million for the JobTrainer program – the States matched funding-based initiative will now be extended up to December 2022. It will be supporting 163,000 places over and above the 100,000 places already being taken up. The initiative is to fund free or very low-cost education programs in fields such as IT, aged-care, and childcare for youths between the ages of 17 and 24, and the unemployed.
  • Funding worth $2.7 billion to boost Apprenticeship Commencements – it is expected to provide support to another 100,000 trainees and apprentices in addition to the 170,000 that are already being supported. The project is now also expanded to include more programs and opportunities for women.

Tax benefits to boost investment and expenditure

The top three provisions from last year’s budget that have been extended are:

  1. LMITO – the Low and Middle Income Tax Offset provision has been extended for FY 2021-22, which is expected to provide $7.8 billion to 10.2 million Australians. The provision might make it possible to boost household spending.
  2. Instant Asset write-off – the provision will be continued till 30 June 2023 for depreciable assets for businesses with an annual turnover under $5 billion.
  3. Loss carry-back provision – the provision will be continued for businesses that have an annual turnover of less than $5 billion, for tax paid previously on the prior year’s profits.

These provisions are approximated to provide a tax relief worth $20.7 billion.

Accounting platforms such as MYOB, XERO or Netsuite can help you make use of these provisions to their full potential in a hassle-free manner with their easy-to-use software. The software is designed to take care of all your financial accounting needs, including keeping track of your accounts receivable and easing your EOFY tax worries! With various plans available, you can choose the one that best fits your budget and business requirements and let digitization make your work easier and faster.

Other announcements

Kate Carnell, in her last week as small-business ombudsman, had recommended government procurement as a priority for the office this year. The budget addresses this key factor for SMEs by including some new funding plans which will help SMEs win government contracts. These contracts, wherein the federal government bids millions of dollars each year, were otherwise reserved for the largest companies on the other end of town.

Apart from this, the government will also be spending $2.6 million on a four-year plan to boost the participation of SMEs in Commonwealth procurement. Increasing the communication of available procurement opportunities to the SME suppliers is one of the five ways in which this initiative will be implemented.

The government also plans to scan the available procurement in order to identify the most common pain areas of the SMEs so that it can better help the business understand aspects like working with government buyers, working in big project environments, and accessing supply chains. It will also mandate the use of Dynamic Sourcing for Panels to enhance the use of panel arrangements.

And lastly, the Department of Industry, Science, Energy and Resources will be undertaking a trial of the direct engagement approach with the SMEs and provide contracts worth $200,000.

Conclusion

The budget is primarily focused on restoring the economic state of Australia and boost the year-on-year growth of all businesses, but more so of the small-to-medium business enterprises. Those businesses functioning primarily on international trade may continue to face challenges since the opening of international borders is still unpredictable. However, this budget brings relief and good news to all the other small and medium business owners in the form of multiple concessions, tax benefits, employment initiatives, and other projects that aim to support substantial business investments and household spending.

Six Key Steps For SMEs To Manage Credit Risk

Six Key Steps For SMEs To Manage Credit Risk

Offering credit to your customers is an effective way of encouraging them to spend more on buying your products or services. In some industries such as wholesale, trade, or distribution – credit might be a requirement for doing business. Extending credit to your B2B customers could also help your business gain a distinct competitive advantage in your market.

While providing credit is good for your business growth, it exposes you to the risks of late payment and at times, non-payment. While this significantly impacts your short-term cash flow, it can also hurt your bottom-line and business growth in the long run. While some business owners may think they are not offering credit, they may already be doing so by sending an invoice after the goods or services are provided to the customers.

Balancing the risks of cash flow reduction and increased sales is the key to robust credit management.

The key risks of poor credit management include:

  • Reduced cash flow: The increase in payment times could impact cash flow and the ability to buy replacement products or raw materials from suppliers is impacted. Many businesses look into debtor finance to manage this risk.
  • Low-profit margin: Credit sales and poor credit risk management can also impact profit margins.
  • Growing debts: Reduced cash flow increases the burden of debts that pose a major risk for the business. Large single transactions are more prone to debt risks – it makes it imperative that your business enforces a consistent accounts receivables process – ideally through automation.

If you offer any other invoice terms not based on cash on delivery, it creates a risk that the customers may fail to pay on time or fail to pay altogether. For instance, if you offer 30-day terms, it translates to credit of 30 days. If that timeframe extends to 45 days or 90 days, the credit gets further extended and increases non-payment risk.

However, with some customers who have a strong and long history of making full payments on time, the credit risk may not be significant. Despite this, there is a risk, even if slight, that your next invoice may not get paid due to a change in the customer’s circumstances or other factors (You can track these in real-time with Credit Insights from ezyCollect). Although these external factors may not be under customer’s control, the outcome is that their inability to pay on time affects your cash flow and eventually, your bottom line.

The first step towards effective credit risk management is understanding your business’s overall credit risk. This helps businesses reduce losses and build up capital reserves. It is crucial to implement a smart, integrated, and informed credit risk management strategy.

The key elements of an effective credit management strategy:

  • Create a credit policy
    • The first step is to develop a strong credit policy that outlines your:
      • Objectives: Describe the purpose of the credit policy that can include the definition of businesses and customers that you plan to extend credit to as well as the terms. Determine how much credit you can safely extend and under what circumstances the credit will be offered. Determine the level of risk that your business can tolerate before setting down the terms.
      • Credit approval process: List the steps on transacting with new debtors such as assessing creditworthiness.
      • Credit limits: Define the elements that contribute to the credit limit of each customer. For instance, all new customers can qualify for a specific limit until the determined number of invoices are paid by them on time. You can also set the limits based on the customer’s risk rating.
  • Assess debtors
  • Monitor debtors
    • As conditions and circumstances can change at any time without warning, it is vital that you monitor your debtors constantly. While obtaining your customers’ approval for performing a credit check periodically, determine from time to time whether they still qualify for credit. If their rating has declined, implement your credit risk management action plan as determined in the first step.
  • Customer relationship management
    • Utilize a feature-rich CRM (Customer relationship management) tool to get timely alerts and payment reminders while ensuring seamless communication with your debtors.
  • Insurance
    • Trade credit insurance protects account receivables and helps cut the risk of non-payment. You can protect your cash flow as the insurance covers up to 90% of the amount due. However, there are limitations to using credit insurance – because it’s a bit like locking the stable after the horse has bolted. A better approach would be to use credit scores and trade insights when you onboard a new customer.

Building trust is the most critical factor when extending credit to another business or customer. While it is always a great idea to start with ‘cash sales’ with a new customer, you can navigate towards credit offerings when the customer has built a strong payment history and inspires the desired level of trust.