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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

The 80/20 Rule for B2B Business

No doubt you’ve heard of the 80/20 business rule, also known as the Pareto principle named after the Italian economist Vilfredo Pareto. The general premise is that the majority of outcomes stem from 20% of your effort. In the B2B world, this translates into 20% of your accounts, fueling 80% of your revenue. 

Another way to look at it is to consider how it reflects your accounts receivable (AR) process. You may find that 20% of your customers are responsible for 80% of your cash flow management problems. It even applies to sales and marketing activities, with 20% of your actions delivering 80% of the results.

When you apply the 80/20 business rule to your account management process, you may uncover problems with time-intensive internal systems. To address these issues, it’s vital to take proactive business planning steps. Learn how to apply the 80/20 business rule to solve your pressing business and credit management concerns.

How to determine costs using the 80/20 business rule

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Image by Emily Newman © The Balance 2019

The Pareto principle is also called the principle of factor sparsity or law of the vital few. The idea stems from the realization by Pareto that land in Italy was owned by 20% of the population. Upon further inspection, it was clear this idea could be widely applied to engineering, computing, and business. It’s used by business owners to prioritize tasks for sales teams and make credit decisions for new net 30 accounts.  For example, when it comes to profitability, 20% of your customers make up the brunt of your revenue. 

So, the question is how to maximize profits off of 80% of your small business clients. It’s important to cut costs in your B2B operations. Yet, you must make sure your solutions don’t harm your clients’ experience. Once you get a handle on this, you can spend less time on AR management while reducing your days sales outstanding (DSO) rates. In many cases, it’s a time management issue. Your teams need to focus on the clients that drive revenue while maintaining relationships with the majority. You do this through streamlining and optimizing the processes you use. 

Optimize eCommerce B2B processes 

If the bulk of your clients experience frustration with your eCommerce processes, then you’ll spend more resources on customer care and troubleshooting. It also leads to higher cart abandonment rates and lower customer satisfaction scores. According to Invesp, “The average eCommerce website conversion rate in the US stands at 2.63%.” If your numbers fall short, then it’s crucial to examine the reasons why and take action. A Baymard survey looks at the biggest reasons for cart abandonment:

  • 21% of respondents complain about a long or complicated checkout process
  • 18% abandoned their cart because they couldn’t see or calculate the total order cost upfront
  • 6% of survey takers said there weren’t enough payment methods

The best way to reduce friction on your site is to optimize all touchpoints and processes. Improvements to these areas result in higher conversion rates and satisfaction levels. To address issues, companies automate the sales cycle, inventory management, and payments. 

Improve professional credit management methods

A slow or manual system depletes time and resources. It’s essential to grow profit margins on that 80% while delivering a smooth experience. Unfortunately, traditional manual processes are time-intensive and prone to human error. And with 90.9% of United States business owners reporting frequent late payments by B2B customers, improving your cash flow management process is essential. 

determining your creditworthiness

Credit decisioning

To confirm trustworthiness and the ability to pay, credit checks are essential. This extends to current customers requesting a revolving line of credit as well as new clients. Small business owners and sole proprietorships may change business names or revenue outlooks frequently, so it’s vital to update customer records. By outsourcing or automating credit decisioning, you can stay on top of your small business clients without taking on additional risk. Ways to improve decision-making via outsourcing or automation include: 

  • Using credit risk monitoring for existing customers
  • Doing individual risk assessments to adjust business lines of credit up or down
  • Maintaining a well-balanced risk profile of new and existing customers

Invoicing

Vast amounts of invoices can bottleneck your company. Invoicing mistakes and inefficiencies lead to invoice disputes, late payments, and even fraud. Many business owners use electronic tools to reduce payment times and automate late notices. However, a friction-less system requires invoice automation and software integrations. These support a seamless process designed to lower DOS and human error. 

Recent information from Dun & Bradstreet breaks down late payments by sector. For example, in the manufacturing surgical appliances and supplies segment, 53.14% pay on time. But, cash flow management takes a hit with high percentages of late payments:

  • 17.27% pay up to 30 days late
  • 6.22% are 30-60 days late
  • 4.33% pay 60-90 days late    
  • 19.04% take 91+ days to pay

Collections

Your collection processes and procedures impact your cash flow management. Start with a successful policy that clearly defines timelines. Then, measure results using metrics like the Collections Effectiveness Index (CEI). To improve your score, consider automating: 

  • Escalation efforts
  • Invoice reminders
  • Late fee assessments
  • Past due reporting

By automating collections and reporting features, your AR management team can quickly prioritize accounts and resources. Collecting timely B2B payments reduce cash flow problems, making this an excellent area for automatic processes. 

Polish A/R management and performance

The adoption of automation in AR management leads to smarter business decisions. An integrated approach supports department-wide goals. Streamlined efforts increase revenues and lower operational costs. Plus, fast and accurate insights give internal stakeholders data to improve systems from the top down. Moreover, by automating key components, you’ll recover and resolve debts faster. Improving A/R management performance is a great way to see results from applying the 80/20 business rule. 

Invest in data analytics

With a robust system for managing data, your team can predict customer behavior like a pattern of late payments. Instead of relying on manual data entry for reporting, integrated systems collect information and place it into an easily digestible format. Forget about the resource and time-intensive processes of manually building reports, which have higher error rates. Automate your systems to deliver real-time information to key stakeholders and enable fast decision-making. 

Outsource B2B credit programs and payments

Offering multiple forms of payment is a must for today’s B2B companies. But, waiting 30 or more days for credit card payments makes AR management difficult. That’s why more corporations turn to outsourcing as a way to improve cash flow. With a partner, like Apruve, sales go through your order management software. Instead of waiting on payments to clear, you get paid within 24 hours. This system allows you to deliver a branded experience without extra hassles from accepting multiple payment methods. Plus, it gives you a way to offer business lines of credit automatically, resulting in less manual work for your team. 

Extend risk free terms

Enhance B2B experiences using the 80/20 principle

Your clients want hassle-free transactions and payments. By automating key consumer touchpoints, you’ll enhance their experience while saving resources. Self-service options continue to be an essential part of improving customer experience. You can apply the 80/20 business rule to the customer experience, as well, with 20% of your actions driving 80% of positive results. So, look for high-impact areas that’ll resolve resource use and improve flow. For example: 

  • AI chat technologies allow companies to address consumer needs even after business hours. 
  • Self-service support options like chat and knowledge bases reduce calls to your customer service center.
  • A net terms program delivers flexible shipping and payment choices to B2B buyers.
  • Automated shipping programs alleviate the burden of manual entry and repetitive tasks.

Put the 80/20 Business Rule to Work

Are you ready to grow your revenue from 80% of your small business customers? By thinking about high-impact actions, automating key touchpoints, and reducing time-intensive methods, you can delight your clients while preserving resources for the 20% of customers who drive your income.

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Topics: Management, Sales & Marketing


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