Covid-19 and Working Capital: Managing Accounts Receivable
Part 3 of a 4-Part Series
Responding to the financial impact of the Covid-19 shut down and disruption requires a firm, unemotional response at a time when that is most difficult to achieve. In this series of articles on working capital management, Focus Management Group will address techniques and approaches for managing each of the components of working capital. The first article addressed accounts payable, the second addressed inventory and now our attention will turn to accounts receivable.
Focus Attention On Accounts Receivable
The management of accounts receivable during the phased return to the new normal is a delicate balance of maintaining customer relationships and maintaining cash flow for survival.
Collecting cash is going to be extremely important during this time period, to ensure your company’s ability to continue to operate after business returns. At the same time, you need to maintain business relationships to keep the flow of information and the flow of cash coming. Using the materials generated in your Customer and Product Profitability Tool and the Accounts Payable Planning and Management Tool, there is a strong base of information for the Accounts Receivable Planning and Management Tool.
How do you help your finance and accounting staff, or your sales and marketing staff, deal with collections calls they have to make to customers?
Provide a road map for your staff to use in making these outgoing collection calls. Develop a script for your staff. Address topics such as:
Assure customers that your company is responding to the Covid-19 situation, and will be able to fill customer needs as long as a plan to work together regarding cash payments is created.
What is the customer’s current level of your product in their inventory? When will they need product again?
What is the customer seeing happening in the next two weeks? What do they anticipate in the thirteen weeks?
Explain you need assistance in helping to anticipate their needs, and you need a plan to receive cash to protect your ability to be there for them after the return to business.
How do you plan your cash receipts?
Plan your cash receipts on a weekly basis. Develop your Accounts Receivable Planning and Management Tool. We recommend that a company review its accounts receivable with emphasis on developing the spreadsheet tool to address the following:
Current customer contact information. Name, title, phone number, email address.
Accounts receivable aging information. Total dollars owed by aging category.
Existing payment terms with the customer. From the purchase orders or invoices.
Historic payment practices for each customer. Weekly, monthly, on due date, paid at 30 days, etc.
Now for the decision making process regarding how hard to push customers for payments, ask these questions and include the information in your Accounts Receivable Planning and Management Tool.
Is this an ongoing customer? Will they be able to place orders in the next two to three weeks? Will they be able to place orders in the next thirteen weeks?
What is the purchase velocity expected per week? What is the needed delivery frequency?
When is the next delivery needed?
Use this information in conjunction with the current business situation. Compare and coordinate the information between:
What are your vendors able to provide for your production?
What inventory do you have on-hand to meet the orders?
Does your production schedule allow you to meet orders?
Be sure to consider:
Is your company the single source of a product that the customer needs?
Is your company an approved vendor requiring end customer approval for substitution?
What are your competitors experiencing?
Once that information is accumulated, critical decisions will need to be made.
Cash Planning: Is a Weekly Cash Flow Needed?
The importance of a weekly cash flow model has never been greater.
The first article in this series addressed accounts payable planning, the second addressed inventory planning and this article addresses accounts receivable management. The interconnection of all aspects of working capital is clearly building. The next article will address cash flow forecasting. The key for a successful phase back into operations is a working capital plan, with a weekly cash flow forecasting tool as the roadmap.
With the accounts receivable information that has been accumulated, the next step is to forecast how to anticipate weekly cash receipts. Using the Accounts Receivable Planning and Management Tool developed using the criteria outlined above will provide guidance for dealing with collecting receivables from customers.
How is the planning tool used?
Customers will be ranked based on the criteria identified earlier, and deliveries will be forecast by individual customer. Categories of customers should be developed with different collection strategies.
The most important customers will require additional planning and payment latitude. Consider requesting payments based on products being shipped in. Use the COD theory to bring $100,000 of cash in for every $100,000 of product delivered.
Consider payment schedules with frequent payments to gauge commitment and ongoing needs.
Consider return of product to reduce receivables and allow product to be sold to other companies who would be able to pay.
Ask the company to sign a note for extended payment schedules.
Consider changes to terms offered. Discounts could increase payments.
Consider the impact on asset based lending relationships?
Forecast the accounts receivable by customer, and roll the customer and the overall accounts receivable forward. This will allow analysis of customer concentrations and accounts receivable aging impacts. This is especially important when forecasting ability to borrow under a line of credit. But, it is also important for any business to understand its customer concentrations, and when it may be serving as a lender to its own customer.
This level of planning can seem monumental, but it is extremely important now. We all have to manage cash as closely as possible, but also provide a roadmap to the return to new normal. Employees, customers, vendors and bankers will all be happier with a roadmap that outlines what will happen. The initial work to develop the roadmap, and even one aspect of it such as accounts receivable, can be overwhelming. With a week of solid hard work, a company can develop its plan.
We are ready to help companies work through their cash flow forecasting and develop their roadmap to the return to new normal. Relative to accounts receivable, this means we will need to develop the Accounts Receivable Planning and Management Tool to work in conjunction with the Customer and Product Profitability Tool and the Accounts Payable Planning and Management Tool. We are able to work with companies to build their working capital planning skills.