CFO's | Drowning in Delinquencies?
When the National Bureau of Economic Research, a private, nonprofit research organization, officially declared that the U.S. was in the midst of a recession, the news was not much of a shock to the countless number of companies that have seen their delinquencies go up in recent months. In a down economy, as more companies are strapped for cash, the number of delinquent accounts is likely to increase, leaving many organizations with cash-flow challenges that impede business success.
Delinquent accounts are a growing problem for businesses of every size—the Board of Governors of the Federal Reserve System notes that business debt has risen 65.9 percent over the past 10 years and that delinquency is rapidly rising. According to the Commercial Collection Agency Association (CCAA), the number of business-to-business (B2B) accounts placed for collection with members of the CCAA rose to a record level for the 12 months ending Sept. 30, 2008, reaching $13,498,720,600, now at EOY 09 $17,762,139,514.
When cash flow is the engine that powers business success, preventing delinquencies from occurring in the first place can make the difference between success and failure—especially in a down economy. Yet many organizations rely on manual accounts receivable (AR) management processes that inhibit their ability to get to the root cause of delinquency and prevent it from occurring in the first place.
Manual AR processes complicate the ability to efficiently identify disputes and accounts requiring documentation. They also impair the ability to identify problem accounts and unapplied cash, which can compromise working capital and the ability for an organization to pay its own expenses in a timely manner. One reason is that organizations simply do not have sufficient resources or experience to develop best-in-class accounts receivable management processes. Another is the lack of well-defined performance monitors and access to technology to manage their processes. To improve AR processes, increase accessibility of working capital, and minimize delinquencies, organizations should consider outsourcing their AR management.
Outsourcing AR brings expertise, resources, and established metrics and methodologies that enable organizations to improve their cash flow and gain a competitive edge. By electing to outsource AR, organizations can establish best practices to improve their processes resulting in reduced operating costs, better control over accounts receivable management, increased sales to slow-paying accounts, improved customer service, and fewer delinquencies, as well as lower collection costs.
The biggest advantage to outsourcing AR is that it can help organizations get to the root cause of delinquencies and put processes in place to prevent them from happening in the first place. By working with an outsourcing provider, companies can improve their front-end invoice submission process, have access to dedicated resources that improve customer communication and service, and are able to take advantage of more robust technology to meet their business needs.
For example, an account may go into delinquency because a customer believes an invoice is inaccurate or that it is not responsible for the charges and, therefore, delays payment. Companies that operate with smaller receivables departments do not have the time or resources to manage their customer relationships effectively and be able to keep up with basic record keeping. An outsourcing provider has dedicated and experienced staff along with the technology to improve the validation process to ensure the payable is accurate. By ensuring invoices are accurate on the front end, payer responsiveness is more likely to increase, thereby reducing the number of delinquencies.
Along with delivering a best practice approach to customer contact, outsourcing also requires less capital investment. Companies are able to harness the skills and expertise of their provider and can handle volume fluctuations without needing to add and train additional staff. This enables organizations to follow up on invoices in a timely and professional manner, ensure accuracy of invoices and provide better service to customers. When experienced staff communicates effectively with customers, accounts are less likely to become delinquent, which translates into increased company profits.
Ease Technology Decisions through Automation
Another benefit of working with an outsourcing partner is access to technology and data that drive better decisions. For many companies, merger and acquisition activity has left them with disparate systems and islands of information that further convolute AR processes and inhibit the ability to make data-driven decisions. Rather than take time and focus off their core competency to research feature sets and technology solutions, partnering with an outsourcing provider can ensure businesses have access to the latest and greatest technology while harnessing the expertise of a partner that has knowledge of not only its own application, but other financial systems as well.
An outsourcing provider alleviates the need for internal resources to evaluate other systems and how they work together because they have standardized technology tools and the depth and breadth of experience gained from working with other companies. By bringing this cumulative knowledge of systems and practices, partner organizations benefit from widely developed expertise and established best practices. It also eliminates the need for capital investment because the outsourcing partner is responsible for the technology investment.
Technology also plays a significant role in reducing delinquencies by offering customers a variety of options for payment and presentment. Electronic bill presentment and payment technologies offer a range of benefits from enabling customers to manage their own cash flow to speeding the entire customer-to-cash cycle. Automating the accounts receivable and payable processes increases invoice and reconciliation accuracy, improving the entire process end-to-end. While companies may not have the resources to invest in this technology on their own, they can gain access to it through the outsourcing provider.
E-presentment and payment technologies empower customers to be self-servicing and make it easier for them to pay on time by providing the
convenience and user-friendly experience they expect. It also supports green initiatives through the reduction of paper, alleviates the need to incur postage expenses, and creates a better record repository to manage customer data. By empowering customers with tools that ease and improve their ability to pay, it reduces the likelihood of delinquencies. Automating transactional activities also removes the focus for internal personnel from manual administrative processes to customer relationship building, account analysis and strategic planning.
Another benefit of accounts receivable technology is the ability for payments to be applied correctly. For customers that may only be able to make a partial payment against invoices within a single statement, they are able to self-service the cash application, eliminating the need for additional manpower. The technology also offers the ability for discounting, which can reduce delinquencies and improve the ability for organizations to obtain working capital in the short term. In addition to improving receipt of their cash, it also enhances the relationship with the customer. Businesses can be flexible and creative in how they help their customers pay their bills while also improving their bottom line.
Through an outsourcing partnership, organizations are able to communicate their billing and credit policies, easily review and identify aging accounts and establish necessary actions, be proactive in communicating with their customers, reduce operating costs, and improve their cash flow. By putting processes in place that prevent delinquencies from occurring, organizations can turn accounts receivables from a lost asset into a high performing one that delivers a competitive edge.
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