Managing Working Capital - The Devil Is In Your Receivables!
Rajeev Chari, Co-Founder and COO, Numberz writes about how they are transforming the account receivables for MSMEs in India.
Cash flows – the CFO’s treadmill!
A continuous WIP
Cash flow is the lifeblood of any business – small or large. It’s a constant tug-of-war between the monies-in (Assets) and Monies-out (Liabilities) that keeps the finance professionals working round the clock. The constant endeavour, especially that of the CFOs, is to make sure that in this war to ‘win’ over the liabilities they are equipped with enough and more current assets. Account receivables – payments that firms expect against the invoices that they raise - form the major chunk of those assets!
Why the fuss about collections?
Businesses can potentially save 1-3% of the top line!
This is nothing new though – and all the CFOs know about it. It’s only a matter of fact that they and their teams have been contending with AR or collections and the challenges that lie in the process since the time commerce began (of course such designations didn’t exist then!). What is also known is that it is easier said than done! Firms need to spend a lot of time, energy and actual money to receive what they owe from the customers. From the customers (clients, dealers, corporates etc) who are very prompt in payments, to the ones who have shifting intents to pay, to a majority who need a lot of follow-ups and ‘delay’ the payments because of process deficiencies - Accounts Receivables is a constant WIP that needs a constant improvement. This is also true for all industries viz Distribution, Manufacturing or Services or business models B2B, B2C or B2B2C etc. It’s true whether you take advances, or do credit sales, whether you raise a single invoice or raise milestone based invoices.
In fact according to PWC working capital study 2018, about 1.1 Tn Dollars are stuck in unpaid invoices. Euler Hermes 2018 Economic Insights report further adds that 1 in 4 companies across the globe receive delayed payments!
Still, why should collections need to be relooked into? There are CRMs and ERPs and accounting solutions abound that are supposed to automate and help out all the firms. To top it, firms have standard processes and people to cater to them.
What’s wrong with what’s already being done?
Challenges with status quo!
As we established above, the impact of the usual methods of collections arises out of the fact that most of the processes in the Invoice to Cash (i-2-c) cycle are either (a) manual or (b) inefficient or both. To add to the challenges is the fact that (c) not a lot of insights can be gathered to ensure that the optimal AR decisions can be taken (eg. customer default risk). Traditionally most of the companies use the existing CRM, or ERP or Accounting solutions to cater to the collections process also. These solutions, while can work in their areas of core competence, don’t necessarily solve the challenges – unless a heavy and costly customization is carried out. The result:
High Day Sales Outstanding (DSOs). This translates into high risk of write-offs or delinquencies.
Low efficiency of the Sales and Finance Teams. Managing AR is an involved process that needs close coordination with all the key stakeholders – finance team, sales team and the customer. And of course the requisite management teams. The teams deviate from their core KPIs to many of the non-value added activities.
Lack of Visibility and Insights. Making the most of the invoicing and payment data – combined with the other data sources is critical to manage the risk and take better AR policy decisions. This usually is lacking the existing processes and solutions.
Any measure to address the above challenges would need to both work in the given context of the business i.e. with the existing ERPs/solutions etc and also should be able to add value to the existing investments while being future looking i.e. evolve with the growth of the company.
Then again – why change? You already know about all this.
Financial consequences of status quo!
But why should this be in the radar of the CFOs? Most of these concerns are known widely and in most of the products and services of the suppliers. The existing product pricing or the terms of service already factor in the perceived costs involved in the collections.
This is exactly the blind spot that CFOs need to take care of. What reflects in the above challenges – finally results in the Annual Report entries like “Doubtful Receivables” or “Receivables beyond 6 months” or even teams always being ‘busy’ in collections or coordinating with Sales teams.
More importantly, lets also look at what does it cost to collect? According to various studies there are both apparent costs and invisible costs that are involved in the process of collections. But they impact the bottom lines directly.
If you notice, these quantifiable and apparent costs when combined with the intangible and often-times hidden costs, take away as much as 1%-3% of the top line.
But these costs, to their full extent, don’t figure in the price structures that are given to the customers. And this is the cost of the blind spot – and the decision that needs to be taken. You pay to collect. How much are you willing to pay, is something that you need to work on.
Ending the quandary!
The first step is to realise that as with other things in life, AR as a process is always in need of improvements. Or at least being open to fact that it might need tweaking if not an overhaul. That’s the battle half won already. The other is to evaluate the solutions that (a) can help you solve the challenges as well as (b) innovatively grow with the growth of your firm as well as the complexities of your business environment. These solutions need not disrupt – but should surely complement the efforts and the investments that you have made in your ERP/CRM solutions. They should also be able to leverage the emerging technologies – Cloud, Predictive Analytics, Block Chain, Robotic Process Automation etc – that are sure to impact not just the work flows of AR but the entire Financial Supply Chain itself.
Any solution that seamlessly straddles the technology as well as the people and the processes, is surely to give you the ROI that you need to start as well as to sustain.
Innovative AI driven Accounts Receivable Solution
This is exactly where solutions like numberz come to the aid of the enterprises – both small and large – by making their accounts receivables faster, easier, predictable and insights driven!
Numberz AR is a secure, cloud based, enterprise solution that enhances the Cash Flows and the Working Capital of the businesses by significantly improving the speed, efficiency and effectiveness of collections. Integrating with core banking platforms powered by YES BANK on the one hand and with the leading ERPs on the other, numberz helps automating many of the current accounts receivables workflows while providing AR insights using AI and Machine Learning.
Numberz capability is grounded in its deep understanding of the business context grounded in its successful Cash Flow Management Solution for MSMEs that saw the cumulative registered base of 16,000+ businesses. Having seen such a strong adoption, numberz AR is the enterprise solution that addresses the critical need of the businesses. With about 150+ small and large corporates already on it, the numberz platform promises to help its clients achieve their AR objectives. In fact some of the reported benefits that can be seen by such a solution are as mentioned in the above table – ensuring not just process benefits but a faster ROI too.
Funded in 2015, Numberz counts Sequoia Capital, Kae Capital and Khosla Impact as its investors. With offices in Gurgaon, Mumbai and Bengaluru, numberz is trying to disrupt the otherwise traditional enterprise AR space – by bringing innovation in the form of AI and Blockchain technologies. Numberz is also trying to bring other banking and insurance products that work directly with the ‘money-in’ parts of the small and large corporates.
Opinions expressed in the article are the author’s own.