Surviving an Economic Downturn: How Optimizing A/R Processes can Help

Why Efficient AR Processes Are So Important During An Economic Downturn

In times of economic prosperity, many businesses tend to overlook the importance of diligent cash flow management, including the handling of accounts receivable (A/R). However, when the economic landscape experiences abrupt challenges, such as a global pandemic or surges in inflation, businesses promptly shift their attention back to cash flow and A/R.

For businesses to thrive and survive in ongoing economic uncertainty, there must be a continuous focus on cash flow management. Most importantly, organizations need to ensure their financial processes are as efficient and effective as possible.

Below, we’ll explore the various dimensions as to why efficient A/R processes are indispensable during economic downturns and how businesses can navigate these challenging times. Additionally, we’ll highlight the importance of A/R in safeguarding a company’s liquidity and financial health.

The Role of Accounts Receivable in Cash Flow Management

According to Shopify, accounts receivable is an asset account that tracks the money due to a specific business from its customers or other debtors. Essentially, the number in the account represents the number of sales made by extending credit to a customer up until the point the business receives the expected funds.

In regards to cash flow, A/R can help an organization determine how long they can allow customers to go without paying. Once the invoice has been sent, the A/R balance is updated with the corresponding amount and remains at that balance until the invoice is paid.

For example, if a sale is made at $15,000 with the terms at 50% credit payable within 45 days and 50% cash, $7,500 will be listed as sales. This is because the amount is considered cash inflow with the remaining balance being listed as an inflow once the invoice is paid in full.

When the economy is strong, most organizations have a little wiggle room around A/R timelines and balances. However, during a recession or a severe economic downturn, a single financial misstep can have devastating consequences.

For example, in 2020 during the height of the COVID-19 pandemic, 62.8% of organizations received financial assistance from the government to pay employees, utilities, healthcare, or other expenses. However, more than 700,000 businesses were forced to close in the second quarter of 2020 due to financial reasons, including lack of cash flow.

Organizations wanting to avoid cash flow disruptions or other consequences must improve the efficiency, accuracy, and precision of their A/R processes. This ensures businesses can continue receiving payments and hold onto allocated funds as long as possible.

The Impact of Delayed Receivables

The impact delayed receivables have on organizations is severe — the numbers below show by just how much:

  • Forbes found that nearly one-third of US small businesses had to wait more than 30 days for payment during 2019.

  • Roughly one in seven UK SMEs failed to pay wages on time in 2019 due to cash flow problems, as reported by Intuit Quickbooks.

Regardless of the reason for late payments, delayed receivables can impact businesses in a myriad of ways, particularly during times of economic downturns. A few are listed below.

  • Constrained liquidity: Delayed receivables tie up a significant portion of a company’s working capital, making it challenging to meet immediate financial obligations. Liquidity constraints can also hinder a company’s ability to invest in growth opportunities or weather unexpected financial setbacks.

  • Increased bad debt: Economic downturns often lead to heightened credit risk, making it more likely that customers may default on their payments. An inefficient A/R process can exacerbate this problem, potentially resulting in increased bad debt write-offs.

  • Cash flow implications: Efficient A/R processes are essential for maintaining stable cash flows. Delayed payments disrupt the cash cycle, making it difficult for businesses to pay suppliers, employees, and other operational expenses on time.

How Efficient A/R Safeguards Business Revenue

Manual A/R processes are often prone to errors and inefficiencies — particularly in organizations with a high-volume function. The impact of these inefficiencies can range from slower cash flow to increased bad debts. Improving processes unlocks a number of business benefits, a few of which are listed below.

  • Preservation of liquidity and working capital: Collecting receivables on time ensures cash is readily available for operational needs. Additionally, this liquidity can act as a financial buffer during economic downturns.

  • Building trust and stronger relationships: Efficient A/R processes not only ensure timely payments but also demonstrate reliability and flexibility to customers. Strengthening client relationships during challenging times is crucial for retaining business and fostering loyalty.

  • Business continuity: In sectors with thin profit margins, efficient A/R processes are indispensable for business continuity. The ability to promptly collect payments can mean the difference between staying afloat and facing financial distress.

  • Faster realization of revenues: Efficient A/R processes expedite the conversion of sales into cash, enabling businesses to deploy funds where they’re needed most.

  • Lower administrative costs: Automating collection efforts reduces the administrative burden associated with chasing late payments, enabling employees to focus on higher-value tasks.

  • Streamlined financial operations: Improving A/R processes leads to more accurate forecasting and budgeting. This enables businesses to make more informed decisions based on real-time data rather than relying on delayed or uncertain cash inflows.

Innovating A/R Processes Starts with Technology

An organization’s success is dependent on their ability to consistently and efficiently manage their A/R lifecycle. Simply automating processes or eliminating inefficiencies may result in some marginal improvements. Organizations must strategically implement A/R automation tools and platforms to not just automate processes, but resolve underlying inefficiencies as well.

Strategic optimization of processes through technological solutions can ultimately result in:

  • More accurate payment predict behaviors

  • Automated customer follow ups

  • Accelerated cash flow

  • Reduced manual labor

  • Simplified collections processes

  • More valuable customer analytics and insights

During economic downturns, optimizing A/R processes via AI and machine learning could be the difference between businesses who survive and those who don’t.

For example, GitHub struggled with manual, repetitive A/R processes that took up too much of agents’ time. Using AI tools in Tesorio, the company reduced the amount of time agents spent on billing-based activities from 45 hours to 30. Additionally, Tesorio’s Accounts Receivable Forecast enabled GitHub to automatically predict, track, and report cash flow which helped outline team expectations and drive performance.

Mitigating Risks in A/R Processes

Every business — regardless of their industry — will experience some risk to their A/R processes. These risks are inherently higher in times of economic uncertainty, making it all the more important for organizations to proactively monitor and mitigate these risks.

Below are a few ways in which organizations can properly manage risks in their A/R processes:

  • Identifying high-risk accounts: Businesses must proactively identify customers at risk of default and take measures to mitigate those risks, such as offering modified payment terms or reducing credit limits.

  • Regularly updating credit policies: Economic conditions can change rapidly during a downturn. Companies should continually reassess their credit policies to help customers adapt to evolving circumstances.

  • Insurance and hedging strategies: Companies can use insurance and hedging strategies to protect against A/R-related risks, including credit, payment, or collection risks. Ultimately, this adds an additional layer of financial security for organizations.

Ready to Optimize A/R Processes?

Efficient A/R processes are not just a luxury during economic downturns. The ability to collect payments promptly, manage credit risks, and streamline financial operations can be the difference between survival and financial distress for businesses.

Embracing technological solutions like Tesorio is an essential step for companies looking to weather economic storms and emerge stronger on the other side. Data analytics tools powered by AI provide a comprehensive picture of customer payment patterns, providing organizations with an idea of when payments are coming. Personalized email templates triggered by specific actions alert teams when it’s time to act, enabling businesses to proactively mitigate risks. And that’s just the beginning.

Discover what more Tesorio can do for your business. Schedule a consultation with one of our team members today to get started.