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Navigating a New Normal: How Businesses Have Adapted Their A/R Practices in a Pandemic

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Posted by Matt Osborn - 17 September, 2020

Navigating a New Normal: How Businesses Have Adapted Their A/R Practices in a Pandemic

In a few short months, the coronavirus changed the landscape for thousands of businesses. Covid delivered indiscriminate blows affecting every industry and the magnitude of devastation has been unfeasible. The Congressional Budget Office estimated Covid will shrink the U.S. economy by close to $8 trillion (3% GDP) by 2030. Further, the unemployment rate jumping from 3.5% to 14.7% within two months (February-April) was another blow as the economy contracted. It subsequently fell to 8.4% by August.

In the aftermath of Covid, as organizations recover, they have implemented sweeping changes. Some are optimizing their credit management services or cash flow management. Others are looking for ways to successfully manage their net 30 accounts and pay on account clients who are struggling. Hence, businesses are navigating a new normal in this current crisis. 

Here are a few ways organizations are adapting their A/R practices. 

Reduce Variable Costs and Ask for Deposits Upfront

"Wine and cheese may get better with age, but not accounts receivable..." Brian Cairns

"My previous consultancy firm has been hit hard by COVID, and I am informed they received a significant decline in both revenues and profits. In order to keep their business afloat and efficiently manage their firm's cash flow, they have significantly reduced their non-urgent variables costs, and they now ask for deposits upfront from clients before engaging in a project," said Carol Tompkins, Business Development Consultant at AccountsPortal.

This coronavirus pandemic environment differs markedly from other disasters the workforce has historically experienced. It isn’t like dealing with the aftermath of an earthquake or hurricane. "The best way to explain the changes we made to our business A/R practices is to share a quote from a blog post we wrote on this subject. 'Wine and cheese may get better with age, but not accounts receivable. They can be like cement blocks that drag you down,'" stated Brian Cairns, CEO at ProStrategix Consulting. 

Monitor Accounts and Look for Ways to Improve Your Cash Flow Management System

“Now we are more vigilant," Bruce Givner

Businesses are adopting a new A/R resilience to improve their cash flow management and line of sight. Some are changing how they approach a net 30 account or days sales outstanding. Others are working on new ways to handle pay for account clients. They’ve displayed ingenious techniques in a downturn despite the pandemic’s disruptions. 

"We used to be lazy. We would not contact clients regarding their receivables until they were in the 120 column. Still, we collected over 90% of our billings. Now we are more vigilant. We contact most – we are still not perfect – of the clients when they fall in the 60-day column," shared Bruce Givner, Esq., KFB Rice, LLP.

Find Cash Flow Management Success

A small business survey found that about 31.4% of businesses estimate it will take 6 months before their business returns to normal activity. Because Covid has no end date (without the help of a successful vaccine), it's causing added pressures. Hence, managing your cash flow is integral to your risk assessment plan and flexibility is key. It's why Bruce is shifting his focus to improving cash flow. 

"We want to stop work almost as soon as their receivables become a problem. This has resulted in stopping ‘spending good money after bad’. It has improved our cash flow. It has undoubtedly kept us out of danger from clients who have fallen into economic problems in the pandemic when their tenants stop paying and/or when they are unable to pay leases," he said.

When managing cash flow:

  • Routinely adjust your cash flow budget and run forecasts. If cash drops, can you pay lenders, creditors and suppliers? 
  • Create a cash war room. Include your CFO, HR, purchasing and sales. This enables you to work on real-time decisions and cash-preservation. Pressure test your projections in different scenarios.
  • Review your P&L, liquidity and cash. Look for savings. Should you reduce hours or salaries to avoid a layoff? Should you plan a hiring freeze or let employees take a leave without pay to retain cash? Should you minimize contract labor and allocate work among permanent staff? Or, do you keep the current headcount to benefit from government assistance?
  • Check your financing terms and talk to your lenders. Don’t assume your terms won't change. How can you optimize cash flow from receivables?
  • Examine your reporting. Make sure financials are up-to-date. Are you automating the invoice reminders you send out?

Other considerations include:

  • Review your projects and initiatives. Should you accelerate, delay, cancel or continue them?
  • Ask suppliers for extensions. If money's tight, review your orders. Can you delay deliveries and cancel orders? When assessing capital expenditures, is now the time to leverage new equipment? Can you find it cheaper?
  • Ask your landlord for a lease variation, rent reduction or payment extension.
  • Pay your tax obligations on time and if you’re behind, set up a payment plan. 
  • Explore government programs during Covid to help businesses of your size.

DSO average customer payemtn

Look for Ways to Mitigate Risks

"Incentives take different forms. For some, we offer discounts for early payments and for others, suitable benefits," Reuben Yonatan 

While many companies have adapted, some sectors haven’t found their footing. Airlines, riderships and the cruise line industry are projecting massive losses. It's estimated that the global travel industry will lose $810 billion. Hence, the pandemic is a disruptive time as some industries can’t accommodate the new social distancing realities. Yet, savvy businesses are successfully maintaining operations and rebuilding despite changes brought on by the pandemic.

Reuben Yonatan is Founder and CEO with GetVoIP, a B2B business. As for how his business has changed during the pandemic, he notes, "During COVID, we are mitigating the risks of our accounts receivables by incentivizing our largest clients to settle their accounts faster. Depending on the client, the incentives take different forms. For some, we offer discounts for early payments and for others, suitable benefits." 

At Prostrategix Consulting based in New York, Cairns said "We focus on the Days to Sales Ratio (DSO). The business, with more than 25 years of experience helps small businesses improve their financial healthGiven the financial stress that COVID has placed on cash, we have found that clients are paying more slowly. We’re understanding, but we also have to get paid so we don’t have a liquidity crunch."  

Moreover, Cairns added, they not only built cash reserves but were able to help clients manage through these times.  But, when it came to Covid, he points out, it wasn't always easy. They had to "enforce payment terms if clients abuse that goodwill grace period". And, he expresses, "Those decisions have been gut-wrenching and difficult, but necessary." 

Ways that businesses can mitigate risks include:

  • Research alternative supply chains if you are experiencing shortages.
  • Incentivize clients to pay their balances off early. 
  • Send invoices as soon as you receive products or service. Or, collect on them in advance. 
  • Review contracts and consider updating terms to limit how customers cancel orders.
  • Look for cost-efficient, online marketing strategies to engage current and prospective customers.

Use Effective Credit Management Services Techniques with Customers

"There have been a lot of changes to our approach to A/R over the past few months," Adam Sanders 

Some organizations are looking for resourceful ways to maintain operations and communicate with customers. They also want to maintain a human approach when working with professional credit management services. This can help you and your customers successfully emerge from this crisis. 

Adam Sanders is Founder and Director of Successful Release, a successful prison reentry program in Pennsylvania. He said, "I run a couple of businesses and consult with many other small business owners. There have been a lot of changes to our approach to A/R over the past few months that have been pretty beneficial to our businesses." 

He offers advice that can help with credit management services.

On keeping communication tight with key customers... 

"Now is the time to keep the communication flowing between you and your top customers. You want to make sure you get as much notice as possible if things start to go bad with them as well as being able to spot any opportunities to expand your sales. Checking in with them regularly to ensure things are going well is a great way to maintain the relationship and subtly remind them that they have invoices that are due."

On finding success over the phone… 

"If you're having trouble getting paid by a customer now is a great time to give them a call. Don't frame the call as a collection call, instead, call them to check-in on how business is going and see if there is anything else they need. Toward the end of the call, you can mention the open invoice and inquire about when it would be paid. If your customer is having financial troubles you can use that time to discuss options."

On staying flexible…

"It's a very rough time for a lot of your customers but many of them will make it through this crisis. If you have the flexibility, now can be a great way to build a stronger relationship with them by working with them on the repayment terms. If you're able to help them out now there is a very good chance that you will have a customer for a long time afterward. This is also a great way to build your reputation and business the right way."

Adjust AP and AR Management Policies and Explore Business Lines of Credit to Manage Gaps

For many businesses, A/R practices during Covid have them entering unchartered territory. The pandemic is an unprecedented time that may require AP and AR management policy changes and payment term revisions.

"My corporate clients have significantly adjusted their supply chain policies and financing options in order to better manage payable and receivables," said Gaurav Sharma, a former banker (Associate Director, Corporate and Investment Banking)  and financial consultant and founder of BankersByDay. "For one, everyone seems to be asking for better terms and getting it. This is indeed dampening cash flows and stretching the cash conversion cycle, but it is a better alternative than damaging your distributor or vendor network." 

As Sharma acknowledges, "The good thing is there is plenty of extra capital available in the lending market so cheap SCF (Supply Chain Financing) options are available to manage the gap. Of course, this also depends on the credit quality of the borrower but we have some innovations here too." And, business lines of credit can offer a cushion - now when it’s needed the most.

Establishing New Business Lines of Credit During Covid

Companies across multiple industries are finding they need immediate access to liquidity. However, there’s a lot to consider before borrowing from existing business lines of credit or a revolving line of credit.

For large corporations with better credit, Sharma suggests, "Arrange for a central SCF credit line for all their channel partners. This will ensure lower rates due to collective bargaining and the risk mitigation offered by the sponsoring corporation," he added.  

He also expresses caution about tightening in industries where credit risks are higher. "Some businesses are more reluctant to extend credit to their partners and at the end of the day, it’s a highly situational call to make. What I am saying is that there is a capital flight to quality in this recession like any other so those with the strongest balance sheets are likely to come out on top."

A few suggestions include: 

  • Communicating with your lenders: Be honest and maintain transparency.
  • Identifying potential problems early: Explore how to address a potential default. 
  • Asking for assistance: Request a waiver, extension or loan modification. Decide if you should open a revolving line of credit. 
  • Assessing borrowing conditions: Establish if you need immediate access to money now to avoid defaulting later.
  • Being candid about borrowing access: Ask the tough questions. What is the exact time frame? Will I receive access to capital the same day or the next day?
  • Considering your 8K filing options: Will you file? Do you need all or only a portion of the credit line?

Modify Your Payment Policies

With businesses adapting to this new reality, another way to help with collections is to offer more affordable payment plans. Adjusting your receivable performance management model can help in this financially challenging time. Your business can maintain streamlined revenue cycles with modified collections.

"One of the biggest changes in our A/R with the onset of Covid has been the way we collect payments. In the past, an invoice would be sent, and the balance was due in full within 30 days," said Sarah Feldscher, Founder of Virtual Desk V.A.

Located in Missouri, Virtual Desk provides virtual assistants (VAs) to help growing businesses boost their productivity. "Since Covid we have adopted a new strategy, this consists of a small monthly discount on packaged services as well as accepting payment plans. Our services are affordable for small businesses and in the past, there was no need for a payment plan for most clients (unless it was a large-special project). However, more of the small businesses we assist wanted to continue their services but were really struggling to make all of their payments," she added. 

The new payment policies that you enforce can help businesses maintain their relationships. 

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Receivable Performance Management and Making Collections During Covid

During the pandemic, it’s important to review your receivable performance management policies. Some customers and clients cannot make payments as the circumstances are beyond their control. Flag the necessary files you want to report to the credit bureau. However, give customers and clients extra time to get back on track. These may still represent future business opportunities once things are up and running again. 

To optimize your receivable performance management, categorize your accounts into clients and customers who: 

  • Want to pay their balances
  • Want to pay their balances but are struggling financially
  • Want to pay their balances but won't proof of the balance due
  • Want to resolve a balance but can’t afford it
  • Can’t or refuse to pay

 

COVIDCollection-01Source: Edmunds

Finding a New Sense of Normalcy

The coronavirus has caused decreases in demand for products and services in most sectors. We’ve also seen disruptions in supply chains and the labor force. But, ultimately, businesses that integrate these new A/R practices can successfully navigate this new normal. 

As Feldscher noted, "Our main goal is to be able to assist businesses of all sizes, so we looked at our procedures and made the change. This allows our clients to continue to benefit from our services while controlling their monthly spending to ensure they are able to survive this pandemic. It was important to us that our clients succeed through this difficult time, as we are not as strong without them."

 

Summary


What are the A/R best practices for businesses in a pandemic?

  • Reduce Variable Costs and Ask for Deposits Upfront
  • Monitor Accounts and Look for Ways to Improve Your Cash Flow Management System
  • Look for Ways to Mitigate Risks
  • Use Effective Credit Management Services Techniques with Customers
  • Adjust AP and AR Management Policies and Explore Business Lines of Credit to Manage Gaps
  • Modify Your Payment Policies

Disrupting B2B

Topics: accounts Receivable, Payments, extending credit, Net Terms


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