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.

 

EOFY: Preparing Your SME For June 30

EOFY: Preparing Your SME For June 30

EOFY or the end of the financial year is the time when small businesses in Australia need to deal with their taxes. However, in 2020, this period posed numerous challenges thanks to the COVID-19 pandemic, and things look to be going on a similar course in 2021.

In this post, we’re going to take you through some handy tips that will help your Australian small business deal with the accounting and taxation challenges that lie ahead. So, without further ado, let’s get right into it!

  1. Secure your IT systems and data

The COVID-19 pandemic hasn’t only resulted in problems in healthcare and the economy – it’s also been the perfect breeding ground for a wide variety of cybersecurity attacks and email scams. Simply put, if you haven’t put measures in place to protect the data of your company, its customers, and its stakeholders, you should get to it without any further delays.

We recommend updating your software and using strong passwords for giving your system the protection it needs. You can also consider multi-factor authentication, which involves setting a combination of security checks. This ensures the prevention of unauthorized access to your business’ computer systems, online services, and applications. We recommend using MYOB or XERO, which are both online financial accounting software with a slew of helpful features.

You should also focus on keeping the data your company gathers from its customers safe. To do this well, your company should have a privacy policy framework that’s robust.

 

  1. Take the help of the Australian Tax Office (ATO)

The Australian Tax Office (ATO) has made things simpler for SMEs in light of the pandemic. For example, if you and/or your employees are working from home, you can claim 80 cents/hour to cover all your running expenses. This eliminates the need for going through complex calculations.

Both small businesses and employers can access helpful information that has been provided by the ATO. Some of the aspects that the ATO has focused on include:

  • Keeping track of employee JobKeeper payments
  • Instant asset write-off
  • Cash flow boosting

The ATO has also provided a list of legitimate deductions for businessmen working from home, which includes:

  • Costs associated with cleaning your work area at home
  • Bills associated with cooling, heating, and lighting
  • Depreciation of computers and other office equipment
  • Depreciation of furniture and fittings that are part of your home office
  • Computer, furniture, and other small capital items that cost below $300 don’t need to be depreciated, i.e. they can be immediately written off in full
  • Costs associated with the repairs of furniture, furnishings, and equipment of your home office
  • Expenses associated with internet and telecom services

 

  1. Prioritize mental health

Most Australian small businesses failed to meet their financial goals in 2020. Not much is going to be different in 2021, given that COVID-19 is still very much on the rampage around the world. In such a scenario, it’s important that you prioritize your mental health and don’t push yourself too hard to achieve the goals that you outlined in the budget 2021 for your business.

Apart from taking care of your own mental health, you should also encourage open and supportive communication among your employees, even if you are all working remotely. The Australian Government has put out some practical ways in which owners and employees of small businesses can access support for mental health issues.

According to the Government’s recommendations, mental health risks can be managed by identifying hazards, assessing and controlling risks, and continually reviewing control measures for ensuring effectiveness. You should also keep your stress levels in check and ask your employees to do the same by:

  • Maintaining a healthy balance between professional and personal life
  • Exercising regularly for improving stamina and boosting your energy levels
  • Getting enough sleep and eating healthy food
  • Not over-committing yourself
  • Planning events well in advance to be prepared
  • Relaxing through activities such as listening to music, meditation, and/or practicing breathing techniques

 

  1. Keep your financial statements updated and reassess them

Simply put, today’s market is unprecedented, and this should be reflected in your forecasts and budgets. Take your financial advisor’s help and keep your financial statements updated, and don’t forget to reassess them periodically to keep track of accounts receivables.

Go into great detail regarding what the effects of the market are on your workforce and your business operations. If you feel you lack the intuition and foresight to predict the changes in this uncertain market, take the help of the COVID-19 Contingency Plan produced by CPA Australia. This plan is sure to give you a much clearer picture regarding the future of your small business in an uncertain market landscape.

 

  1. Count on your advisors

Financial advisors are more important than ever before, and you should seek counsel from them to steer your business through this uncertain period. EOFY processes can be daunting, and if you want to tackle them yourself, it can impact your business’ productivity negatively.

That’s why if you don’t have a dedicated financial advisor for your business, it’s time you choose one. Thankfully, there are many experts out there who can help you out. While you will have to shell out more money to hire the services of a reputed financial advisor, you should consider it money that will be well spent in the long run.

Additional tips for EOFY for small businesses

  • Prepare the profit and loss statement that outlines your business expenses and income. For tax purposes, it’s best to consider JobKeeper payments as income.
  • Keeping records of depreciating assets is vital. You should have records of these assets for as long as you have them and for an additional five years following their disposal. Fast-tracking depreciation is also an option for some SMEs now. Find out from your financial advisor if your small business is eligible for it.
  • If your business is a buyer and seller of products, you should undertake a stock take. Your records should consist of every stock on hand along with their respective values. Other records necessary include when and how the stocktake was done and by whom along with the basis of the stock valuation.
  • You should have a summary of your creditors and debtors prepared. During the preparation of this summary, you should take debt repayment plans and/or creditors’ agreements into account. This is especially important if your business has been through a restructuring and is currently implementing a post-COVID recovery plan.
  • You should have digital records and/or scans of all business-related documents that are paper-based. Make sure that all the digital records have backups as well.
  • Ensure that you meet all superannuation obligations that concern payments made to super accounts of employees.
  • You should finalize GST reporting, fringe benefits tax records, and Single Touch Payroll income statements.

So, now that we’ve taken you through the handiest tips for getting your SME prepared for EOFY, we hope that your business will be ready by the time June 30 comes around. To conclude this post, we’d like to wish your business and its entire workforce all the very best for the future.

 

 

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.

How an enhanced credit application process can protect your business from bad debts

How an enhanced credit application process can protect your business from bad debts

Businesses who extend credit to their customers face the risks of non-payment or delayed payment that impacts their cash flow and business growth.

To mitigate such risks, businesses need a robust credit risk management policy. The key elements that the credit policy needs to include are:

  • A comprehensive understanding of the customers’ risk profiles – Verify the legitimacy of businesses by checking their ACN or ABN numbers apart from obtaining details such as place of business, contact details and credit references. For individuals, assess their credit score, history of payments with other creditors, contact details, address and litigation history, if any.
  • The business’s risk tolerance levels – Evaluating the business’s risk appetite is vital to determining what constitutes a safe credit risk. One way to assess your current credit risk is to calculate the daily sales outstanding (DSO) and receivables turnover ratio. While a low DSO indicates your outstanding payment collection is quick and effective, a high score indicates payment delay. A high score on the receivables ratio also shows that your business has a healthy system of payment collection.
  • Clearly worded and carefully crafted credit terms and conditions – To minimize credit risk, crafting the terms and conditions, as well as wording it clearly, are crucial. Include relevant details such as the credit check process, references, penalties for late payment, disclaimers, terms for terminating the contract and time frame.
  • Effective customer relationship management – A streamlined customer relationship management (CRM) software tool can help you communicate seamlessly with your customers while enhancing their experience. With timely reminders, you can ensure there are no late or missed payments.
  • Ongoing monitoring and risk assessment – After you extend credit, best practices in monitoring and payment management can help minimise risks of delayed payment or non-payment. Ensure ongoing monitoring of your debtor’s credit rating and risk while ensuring a fine-tuned process of overdue payment collection. Terminate the contract with your debtor when your risk reassessment process shows there is a decline in debtor’s credit rating or that there are adverse events such as court ruling.

A strong credit application process is the key to minimising your risks

While these factors play a crucial role in minimising your risks, the key element in the credit risk management process relates to the credit application system. A recent survey indicates that a key source of information for a majority of credit managers across businesses is the credit application form. The credit application helps credit managers and businesses make an informed decision on extending credit to the right customers.

Creating a comprehensive credit application form that captures crucial information, such as:

  • The full name of customers or business entities
  • Business structure such as company, sole trader, partnership
  • Details of directors, owners and partners of the business
  • ABN or ACN of businesses
  • Postal address
  • Email address
  • Telephone numbers and place of business
  • A minimum of three references and their contact details
  • A signature to confirm the debtors have read and understood credit terms and conditions
  • Customer approval for conducting a credit check

While these details help you assess the ability of customers to meet their credit payment obligations, the credit terms and conditions set out in the application form help to

  • obtain credit reports as per the Privacy Act of 1988
  • ensure the debtors understand and accept the terms of credit
Paper or PDF Credit Applications Are a poor customer experience

How smart is your current credit application process?

If your business is utilising paper/pdf/email-based credit applications, they could be impacting your business profit and growth in a significant way.

The impact on your business is three-fold:

Poor customer experience – Filling the paper-based or PDF-based credit application form each time the customer applies for credit is not only time-consuming but can be a frustrating experience. Apart from filling in contact details, debtors have to fill in many fields in the form including references, their contact details, and for businesses, ABN, ACN, and business structure details. Customers who are looking for a quick process to complete a purchase are faced with longer times for filling and submitting the form, which in turn means they need to wait longer for credit approval.  Eventually, the delay reflects on your sales while the poor experience in filling manual forms can make your customers turn to your competitors who have a simplified system.

Prone to errors – Illegible handwriting or unintentional errors while writing on paper or PDF credit applications can lead to more errors in reading and transcribing the data into your systems. It is quite common for a debtor to write the business name or ACN / ABN incorrectly. Clearly, the impact of having the wrong address, company/business number and contact details will enhance the credit risk as there may be no means of contacting your customer in case of delayed payment.

Relies on data and references provided by the customer – Manual credit application forms are not just time-consuming but can be misleading, leading to your business extending credit to unsuitable customers. With the paper-based credit application system, you are essentially relying on the information and references that your customer provides. No customer would want to paint themselves in poor light when it comes to references, and negative information is likely to get hidden from your view.

Manual credit application processes increase the chances of errors and impact your decision-making significantly. They lead to longer processing times which means your sales might be impacted – and they rely on your customers providing trade references, which may not give you a completely unbiased view of your potential risk with the new customer.

The solution: Switch to a Digital Credit Application

When your current paper-based credit application process is hurting your business, it is time to switch over to a smart online credit application system from ezyCollect.

ezyCollect’s automated credit management system optimises efficiency and accuracy to ensure you make the right credit decisions every time. The process ticks the right boxes in terms of credit reporting apart from enhancing customer experience. Our online credit application leverages real-time data from the market, customers’ historical transactions, and payment track records to make smart and accurate predictions on late payment and non-payment.

The state-of-the-art online application process is quick, seamless and accurate. This helps minimise errors and eliminates the delays in turnaround time associated with manual processes.

With ezyCollect, you can empower more new customers to make their credit application online. By eliminating the laborious manual and administration data entry, the application turnaround time is reduced, which shortens your sales cycle.

Smart Credit Application From ezyCollect
Switch to a smart online credit application system

Here are the key benefits of switching over to ezyCollect’s smart Credit Application system:

Easy to use – The online form for credit applications is easy to use, doing away with the time and effort needed to install and master complex software. The application form can be fully customized to match your company’s color scheme & branding. Your customer can access the online form with a simple click on the link provided on your website.

Get real-time updates on business credit scores – Get a clear view of your customers’ payment habits and the most accurate prediction about their ability to make timely payments. ezyCollect provides a Failure Risk Score and Late Payment Risk Score based on a partnership with illion, one of the world’s leading credit reporting brands – which gives us an extensive database of payment information and other variables such as payment history, court actions, financial statements, payment defaults, company age and business structure. This helps you get a complete picture of the credit risk associated with any potential customer – so you can negotiate the terms to suit. Eg: Credit Scores using ezyCollect’s ABN

These comprehensive credit scores help you identify the customers who may pose a risk to your business in terms of credit payment.

Option to request a comprehensive credit report – ezyCollect facilitates informed decision making whether it is for low, medium or high-risk credit decisions with insightful reports. Leverage the option to request a comprehensive credit report that offers everything you need right from payment predictors, risk scores, identification details to financial stability predictors. The comprehensive credit report includes the business’s credit history, long-term operations, stability and profitability, which removes guess-work from your credit decisions.

Perform credit checks on your existing as well as new customers with ezyCollect’s comprehensive credit report. Gain valuable insights on a company’s credit risk thanks to the access we have to exclusive and shared data sources.

Complete audit history showing all steps in the credit application process – Get access to real-time ASIC data that enables you to confirm the existence of a business entity and its operational status. Make the best decision with historical data on previous company names, addresses and directors that allows tracking of the entity’s previous structure and financial history. With automated assistance for completing the online application, the time for credit can be reduced drastically, that translates to seamless customer experience and more sales.

ezyCollect empowers businesses by maximising their competitive advantage with real-time and updated information on customers and accurate prediction on credit risk. By using our online automated credit application process, you can realise exceptional business benefits that include onboarding new customers in quick time, improving customer satisfaction and outperforming your competitors. With all the information you need available at your fingertips, you can optimise decision making, avoid bad debts while ensuring your cash flow is healthy.

Switch to ezyCollect credit applications to make the credit application process easy, engaging and hassle-free for your customers.

The complete guide to managing and preventing bad debts in B2B

The complete guide to managing and preventing bad debts in B2B

There are three key drivers of growth in a business- product, sales, and cash collection; however, the third one rarely receives the attention it deserves. Businesses often focus on sales/marketing and product – while taking cash collection as a given. The success of many B2B companies depends on their ability to manage the receivables collection function efficiently. And this is a function that deserves more attention, investment, and, dare we say, credit than it usually gets.

When you sell a product or perform service on credit, you are also in the B2B accounts receivables collection business. The financial health of your company depends on how well your business can collect on sales. Unfortunately, it is often performed with inadequate forethought to the systems, staff, strategy, and tactics to deliver exceptional results. And businesses find that their customers are using them as a bank, with many overdue invoices impacting the cash flow and growth prospects of the company.

Here we will look at how it is possible to increase your company’s cash flow performance with better planning, execution, and technology

What causes bad debt issues for business?

Credit, or rather the lack of credit-risk strategies, can often lead to bad B2B business debts. The problems can intensify with the lack of efficient operating models and insufficient management focus.

Lack of credit risk strategies

Many businesses do not implement a robust framework for credit-risk assessment. They do not follow the global best practices that reduce customer delinquency and debt collection. Not accounting for credit risk can lead to unhealthy business growth. It expands the customer base but depresses the profitability.

Companies with a credit risk framework often do not monitor pre-delinquency or follow the same approach for each bad debt. These companies seem to follow the same settlement strategies for all delinquents instead of adopting a customized approach for each such customer.

Lack of specialized staff for debt collection

Most companies do not have a specialized debt collection team, and they mostly rely on external agencies for the same. Some outsource this job to call-center agents who lack proper training to assess a customer’s situation. These agents, thus, fail to provide the right settlement options to these customers.

When the responsibility for collections lies between multiple departments, it is difficult to establish clear ownership of credit risk. Often, such companies lack staff that specializes in credit and risk management.

Lack of management focus

Top executives seem to be more occupied by transformation, innovation, and digitization that accounts receivables & collection is usually not in the spotlight. Bad debt figures don’t often feature on the agenda, making it harder to improve the situation.

How does bad debt, when left unchecked, impact a business?

Bad debts are never good for a business. They affect company finances as well as the accounting process. Bad debts often complicate the accounting process making it difficult to comprehend when a sale was completed. Accounting for an unpaid sale requires a variety of collection and reporting procedures.

Preventing bad debts is essential not just for the company’s financial health but also to minimize reputation and relationship risks from the collection process.

How can one manage bad debts effectively?

Debt management is vital to a business as it ensures that the company has enough working capital to reinvest and grow. Effectively managing debt requires some thought and planning and can be controlled with these simple steps.

Implement a credit policy

Most businesses have an informal arrangement for supplying goods and services. Not having clear, written terms of trade can lead to several disputes creating bad debts.

B2B companies require a firm credit policy to ensure their continued growth. Before offering credit to new customers, companies should conduct a thorough credit history and business reference check. Document the terms of business and the credit limits, and initiate business only when your customers understand, accept, and sign the business terms. 

Implementing new payment terms and conditions is better done with new customers or those looking to extend their credit limit. Introducing new terms to existing customers could upset them and affect their loyalty.

Avoid pricing disputes

Customers are more likely to pay you on time when you provide them with the right information on documents and invoices. Disputes can create bad debts that can significantly impact the business.

All your documents- quotations, invoices, contracts, purchase orders, and estimates should refer to your terms and credit policy. Make sure that the invoices and financial statements clearly show the amount due and the due date. The company’s billing address and bank account details should also be present on such documents.

It is a good idea to check with the customer if they need any additional information to expedite the payment. Indicating collection charges for overdue accounts on your invoices and statements can discourage late payments.

Use credit management software solutions

Well-maintained information is the key to good debt management. There are many credit management software solutions available in the market that can ease your company’s debt management process. These software solutions can closely monitor your debtors’ ledger and keep track of the outstanding payments. These solutions also offer regular reporting to help identify trends and patterns before they can impact your business’ cash flow.

Provide multiple payment options

One of the simplest hacks for getting paid outstanding invoices paid quickly is to add a multitude of payment options (credit card, bank transfer, cheques) – from a ‘Pay Now’ button on your invoice to enabling debt financing solutions – where you customers can get the outstanding invoices financed and pay you while they manage the repayments. The simple philosophy is to provide no excuses for your customers to not pay you – something which we adopt here at ezyCollect as well.

Implement AR automation

Accounts Receivables automation modernizes the accounts receivables process through automatic, electronic systems that decrease repetitive and time-consuming tasks. It frees up time for your accounts receivables team to chase payment and get the cash in to mitigate bad debts, rather than wasting time on printing and posting invoices.

AR automation improves the accuracy of invoicing details, leaving little to no room for an excuse for late payments. The AR team gets more time to chase payments and handle exceptions making collections fast with less delinquency. 

Strengthen your delivery systems and implement the practice of keeping signed dockets as proof of delivery. When you automate the AR process, it becomes possible to send invoices ahead of time, discouraging customers from making late payments. It can also send automatic reminders when customers deviate from your trade terms.

Review credit limits of your customers

Review the credit limits of your customers regularly. Look out for warning signals which could indicate that they may be facing financial problems. Check on all customers, even the long-standing ones, to monitor changes in buying habits or an increasing level of debt.

Wherever possible, refrain from doing business only with one substantial customer. Customer concentration risks outweigh the benefits. Be careful of customers who are expanding rapidly as their business growth can sometimes affect their ability to pay. Do exercise caution when handling requests for extending credit.

Stop supplying to customers who do not pay their accounts on time. Initiate a discussion about the situation and try and reach a settlement for payment of past supplies.

Importance of onboarding new customers with comprehensive credit checks

The core of a sound onboarding practice is to ensure that potential clients can pay for your goods or services. Implementing complete business credit checks allows you to access a client’s payment history, giving you useful information about their ability to pay, now and in the future. When you know a client’s potential payment pattern, you can make an informed decision if and how you would like to conduct business with that customer. The existing process of getting trade references and having your customers and sales teams fill out forms isn’t the most effective one – you might consider investing in a service or resource that can complete comprehensive business credit checks for you rapidly and help you transact with the right customers for your business

When you have insight into how a potential client manages financial responsibilities, you can make amendments to your payment terms and credit limits. Customizing payment terms for different customers helps safeguard your business from unreliable clients and cuts down the risk of bad debts. For instance, if a credit check indicates that a potential customer is a payment risk, you may front-load the payment terms or not offer credit at all.

Credit checks can be invaluable to mitigating risks and protecting your business from potentially expensive mistakes.

In Summary

B2B businesses face several challenges when collecting outstanding payments from delinquent customers. Developing a well-structured process, leveraging digitization, and upgrading your teams’ resources and capabilities can maximize recoveries and prevent bad debts. With an increased focus on debt management, companies can reduce high costs and lost income and enhance customer focus, customer engagement, resilience, and profits.