The CFO’s Recipe for a Successful Accounts Receivable Team

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The CFO of 2021 has two primary objectives: Put the business in a position to succeed and provide a return on investments to its owners and shareholders. The pandemic reinforced how crucial ready cash is to achieving those objectives and, more specifically, how important direct method cash flow forecasting is to today’s finance organization.

Unlike indirect method cash flow forecasting based on your periodic balance sheet, income statement, and cash flow statement, direct method looks at today’s actual cash inflows and outflows. It provides a high degree of certainty and accuracy about when and why every dollar is leaving your company and coming into it.

You generally have less control over cash coming in through accounts receivable than cash paid out, so it’s up to your Accounts Receivable team to reduce that volatility. In my private equity experience, and as the current CFO of MarkLogic, there are four critical ingredients for building the Accounts Receivable team that can accomplish that key goal.

1. Dedicated Accounts Receivable Talent

It starts with people. From the controller down, you obviously want accounting professionals with excellent financial skills, but they also need to understand your business. Beyond that, hire people with a track record of being customer-centric and doing the right thing for the business.

2. Actionable Metrics

Next, add in the right key performance indicators (KPIs) that help you and your Accounts Receivable team understand what’s happening with your collections so that you can act where needed. Measure what really matters, including Accounts Receivable metrics like these:

  • Days Sales Outstanding (DSO): Average number of days it takes your company to collect payment on sales.
  • Average Days Delinquent (ADD): Average number of days invoices are past due.
  • Collection Effectiveness Index (CEI): Comparison between the total amount you’ve collected against the total amount of receivables in a given period, usually one year.

3. Smart Accounts Receivable Strategy

Ideally, strategy is where the CFO and accounts receivable team spends the most time and energy. By addressing questions like these, you can make decisions designed to help reduce cash inflow volatility:

  • How do we view customer credit extension?
  • How do we make credit decisions?
  • What processes and parameters need to be in place?
  • How do we judge customer creditworthiness?
  • Do we give early payment discounts?
  • Do we factor in our receivables?
  • In what tone and style do we communicate with customers about collections?

4. Automated Tools

The final critical ingredient needed for a successful accounts receivable team is the right technology stack. Digital finance tools like Tesorio Accounts Receivable automate the mundane and repetitive accounts receivable tasks so that you can:

  • Spend more time on planning and strategy.
  • More easily calculate and understand your KPIs.
  • Speed up invoicing and collections.
  • Leverage technology to make it easier for customers to do business with you, such as implementing electronic payments processing.

Set Up Your Team for Success

Bottom line, to do your job as CFO, you need an accounts receivable team equipped with the right knowledge, metrics, strategy, and systems to optimize incoming cash. That’s the recipe for success in today’s cash-driven environment.

Learn more of Dan’s thoughts on AR teams and direct method cash flow forecasting by listening to Tesorio’s recent webinar How Great CFOs Empower Leading AR Teams ...and how leading AR teams make CFOs look great.