Deloitte has published its Working Capital Series, that includes Strategies for Optimizing Your Accounts Receivable; Strategies for Optimizing your Accounts Payable; Cash Management; and Strategies for Optimizing Your Inventory (read report here).
I enjoyed the Strategies for Optimizing Your Accounts Receivable. It is a short and worthwhile read.
The series argues that given the cost of new capital, no business can afford to let its existing capital go to waste. However, often a business doesn’t realize how much cash is trapped on its own balance sheet. Freeing up that cash – by optimizing its working capital – delivers more than improved operational efficiency. It also gives a company the added liquidity it needs to fund growth, reduce debt levels, lower costs, maximize shareholder returns and even outperform its competitors.
The article notes that most businesses have AR policies that dictate when to bill, how much to bill and when to collect. Unfortunately, not all businesses enforce those policies effectively – or even adopt the right processes at all. In many cases, it comes down to culture. A business that prioritizes sales often falls into the trap of extending credit to customers, offering discounts or ignoring payment terms if it means winning new sales. However, if management does not have a focus on working capital, no one will. The upshot? You end up unintentionally providing customers with free financing.
While no company intends to adopt weak accounts receivable policies, lack of planning, poor enforcement or a failure to focus on the function can result in unintended consequences. These often arise when companies:
- Fail to follow up with customers in a timely manner when payments are past due
- Allow sales reps to override credit limits – and end up suffering losses from bad credit risks
- Neglect to provide staff with appropriate training on how to deal with late paying customers
- Don’t pay sufficient attention to the accuracy of their bills, invoices or credit terms
- Allocate cash payments incorrectly, making it harder to figure out which payments are outstanding