A couple of weeks ago, we hosted a webinar with Pam Krank, President of the Credit Department (TCD). She has great insight into cash flow with over 37 years managing trade receivables and working with CFOs. During the webinar Pam focused on how credit departments can improve areas of cash forecasting. They can help their CFOs achieve their “CFO”: predict when money is coming in and if it's not arriving, why not?
We’re at mid-year mark for 2016. This is the time companies start reflecting on the last 6 months to see if the objectives they’ve set are on the right track. For the role of the CFO, this is very true as they are overseeing a sea change. With emerging digital technologies, CFOs are challenged to look past their traditional processes to increase productivity, efficiency and accuracy. What is the main objective they will be reflecting on? I like to call it the CFO – Cash Flow Objective (CFO) – this is what keeps your CFO up at night.
According to a survey of 650 CFOs by Protiviti, CFO’s are seeking more precision and efficiency in cash forecasting, period-end close and reconciliation and consolidation activities.
Protiviti highlights that, “cash forecasting represents one of the highest-ranked priorities, which may be indicative of the tepid economic recovery in many industries.”
So, if cash flow and forecasting is a main objective, how is this performing and was it one of your priorities on your new years to do list?
Here are a couple of tidbits our recent webinar “What CFOs Want from their Credit Departments” to help get you get started on the road of accurate cash forecasting:
1. Tracking incoming cash
How do you measure and report on your customers average days to pay (ADTP)? Look at the best possible way they could be paying and how they actual pay their invoices. Pam recommends applying a calculation to forecast due dates. Look at the history of how your customers pay. Is there any seasonality in the business or outliers? If so, take the outliers out and take seasonality into consideration while mapping out days to pay over the best days they could be paying. This will help forecast particular due dates.
Do you have a daily cash plan? Pam recommends creating one for your CFO on a weekly basis so they understand changes in the customer plan or new disputes.
Fast forward to the 4 minute mark to dig into her insights on how to track incoming cash in the recording below.
2. If cash is not forecasted, why not?
If your receivables are not converting, do you know why? Pam recommends creating a monthly dispute report for your CFO to highlight underlying problems with invoicing. Pam suggests coding your invoices with two codes, (1) dispute and (2) reason, to provide colour on why the invoice is unpaid. This is a great report to provide your CFO with intelligence on why cash is not being collected and close these gaps so these issues do not happen again. Some examples of reason codes for disputes Pam shared include: total order not received, duplicate billing, returns-damaged, incorrect product total, quantity total, item not accepted – damaged, pricing error.
In addition to a dispute report, exception reporting is a great way to see specific accounts that need attention. With exception reporting, the credit department sets parameters to see which late payers fit this category and take action on these accounts. For example accounts with $30 K past due over 60 days outstanding could be an exception report parameter. Pulling a report with the customer name, invoice outstanding, status, and notes will help the CFO understand why they are major delays in payment and strategize with the credit team on how best to collect.
3. Be the data center
One of the best ways credit departments can help CFOs meet their “CFO” is to be the data center. At any given moment, credit departments should be able to report on why receivables are outstanding, create accurate cash forecasts, predict payment habits based on risk and actual payments and provide detailed reasons on why cash isn’t forecasted and what’s being done to solve it. The reports mentioned earlier can help, but credit departments should consider looking into an accounts receivable platform that can help them effectively track and forecast cash and pull these reports. Which leads me to the next tidbit…
4. Utilize technology to make reporting easy and more accurate
There are a couple reasons for cash delays that can be mitigated with an accounts receivable (AR) platform that automates manual tasks and allows for robust business intelligence to understand customer behavior and probability of payment.
Some typical reasons for cash delays that could be solved with an account receivable platform include:
Disputes (pricing, quality, delivery)
Customers refuse to pay when they have what they were promised was not what they received. Usually disputes are found once the account is past overdue and the AR team reaches out to find out why it hasn’t been paid. With an AR platform, customers can open disputes right when they receive the invoice online, allowing the AR team to be proactive on resolution.
Purchase orders (PO) not reviewed / confirmed
Pam mentioned in the webinar that one issue she sees in companies is that POs are not reviewed by the credit department. Therefore terms promised on the PO are different then the terms the credit department forecasted, causing discrepancies in cash forecasting. With an AR platform, POs can be uploaded and attached with the invoice with notes, providing the credit department with full visibility into the terms the customer has agreed to.
Invoice not received / entered
With an AR platform all invoices are created online or can be pulled automatically from your ERP. The invoice is sent directly from the platform to your customer online with invoice tracking (did customer open invoice, how many times was it opened, who viewed it, etc.). Therefore, it is incredibly hard for an invoice to be missed / not received because the system does the manual work for you. If your customer has not viewed the invoice, the AR platform will take care of follow-up by sending automated reminders to prompt your customers before the invoice becomes overdue.