In B2B commerce, payment systems often rely on manual processes — think paper invoices and checks. A recent article placed in the Wall Street Journal (WSJ) by Deloitte, Trade Credit in Focus: Challenges and Options for the B2B Sector, notes that advancements in technologies like blockchain, robotic process automation (RPA), and AI/ML, are driving digital transformation in areas such as accounts payable (AP) and accounts receivable (AR) processing. As a result, trade credit, where businesses extend financing to customers, is undergoing rapid advancements, but it also poses high risks, especially in assessing creditworthiness, dealing with economic fluctuations, and fraud.
Updating trade credit programs goes beyond defensive measures; it should also align with growth strategies, lower operational costs, and enhance the customer experience. It’s critical you identify inefficiencies by analyzing cash conversion cycles, accounts receivable cycles, credit risk profiles, and payment histories.
That may seem like a lot, and it is, but the WSJ article recommends focusing on three main areas in order to implement change in longstanding processes. Here’s what the author suggests:
Review in depth the sales and payment histories for their major B2B customer segments. Include analyses of receivables aging and delinquency to help identify opportunities to improve cash flow.
Work with frontline teammates to analyze common customer journeys when requesting and receiving trade credit as part of buying from the organization. Identify friction points that may result in lost sales, missed payments, or one-and-done purchasing.
Prioritize opportunities to improve the overall end-to-end flow by modernizing AR process and trade credit offers underlying the customer journey.
While these are excellent recommendations, they are a bit laden with consultant-speak. To clarify the situation, this article will dive into the details to help you understand the practical application of these recommendations and the enormous opportunities they represent.
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Customer Analysis
The first task Deloitte recommends involves customer analysis. This is because your AR portfolio is a fount of information waiting to be tapped.
Review in depth the sales and payment histories for their major B2B customer segments. Include analyses of receivables aging and delinquency to help identify opportunities to improve cash flow.
Their are two primary aspects to keep in mind as you segment and analyze your AR portfolio: sales opportunities and customer profitability. Customer profitability is the more complicated of the two, but it provides the bedrock for understanding sales opportunities.
Customer profitability is primarily affected by two factors: product mix and payment history. A customer’s product mix will largely determine the gross margin for that customer. How they pay, determines any additional collection costs that will reduce gross margin. The profitability of customers that tend to pay significantly beyond terms or that regularly raise disputes or take payment deductions can be severely impacted.
Understanding your AR portfolios dynamics will enable you to identify those customers that are on the higher-end of profitability as well as have underutilized credit capacity. Focusing sales efforts on these customers and finding ways to more cost effectively deal with lower margin accounts that offer little to no sales upside will have a very positive impact on sales, profits and cash flow.
One additional note about cash flow optimization: in all likelihood, the 80/20 rule has some very practical applications to your AR portfolio. 80 percent or more of your sales will be derived from just 20 percent of your customers. It is critical you focus your credit and collection resources on these key accounts. In contrast, the 80 percent of customers that account for only 20 percent of your sales are absorbing the lion’s share of your credit and collection time and costs.
Going a step further, the bottom 40 or 50 percent of customers are likely to account for only 5 percent of your sales and even less of your profits. If you grant open terms to these accounts and they do not pay you when their invoices are due or shortly thereafter, you need to find alternative ways to sell to them. They are not worth your time from a credit and collections perspective.
One alternative is to require payment at the point of sale, if only by credit card. Third party financing is another alternative, and can be appropriate for the entire 80 percent of your customers that are not key accounts. Another option is to implement a minimal sales amount and, if possible, refer purchase requests that come in below that line to distributors. I’ve seen all three of these options implemented to very good effect in that both sales and cash flow increased.
Customer Experience
The second recommendation deals with your customers’ experience (CX) in doing business with you. Failure to include consideration of CX in AR modernization initiatives will result in points of friction with your customers being overlooked.
Work with frontline teammates to analyze common customer journeys when requesting and receiving trade credit as part of buying from the organization. Identify friction points that may result in lost sales, missed payments, or one-and-done purchasing.
In 2019, The Hackett Group’s “Customer-to-Cash Experience Poll” revealed that though 64 percent of the organizations (albeit mostly large corporations) had a formal process for responding to customer feedback, most feedback was handled via phone calls or email rather than an electronic invoice presentment and payment (EIPP) platform. Moreover, just 50 percent reported their customers rated their service as either great or excellent despite the vendors’ investments in process efficiency.
Eliminating this transactional friction is a key component to improving CX. Friction is caused by things like off schedule pricing, Purchase Order and Invoice mis-matches, shipping errors, and sales tax errors. All these issues result in billing errors, which in turn complicate the collection process and annoy customers.
Eliminating these errors improves invoice accuracy, which in turn improves CX and significantly shortens the payment cycle. In addition, offering customers the option of paying via their preferred method, and providing a variety of trade finance options, which can include discount and extended terms options available through third-party finance partners, further reduces friction and makes it easier for customers to do business with your company.
Order-to Cash (O2C) Process Improvement
Deloitte’s third recommendation involves making O2C process improvements. This involves the customer application and onboarding process, credit evaluations and approvals, order fulfillment and billing accuracy, collection strategy and workflow, deduction management, dispute resolution, and remittance processing.
Prioritize opportunities to improve the overall end-to-end flow by modernizing AR process and trade credit offers underlying the customer journey.
The Hackett Group’s data shows that world-class finance organizations, which exhibit higher automation levels, spend 64 percent less on the customer-to-cash process as a percentage of revenue and employ 66 percent fewer staff than typical organizations. Eliminating manual interactions across the O2C process is transformational in itself, and even more so when the customer journey has also been addressed.
The Benefits of AR Transformation
The management of trade credit has been evolving since accounting software solutions where first introduced. Computerization disrupted a manual, albeit unified, O2C processes. For over 60 years, businesses have been working around a fragmented O2C process, but now unified, digital processing is within reach. This AR transformation comes with a long list of benefits:
Greater efficiency
Lean organizations
Cost-effective processing
Higher visibility of risks
The elimination of transactional friction
Greater ease for customers doing business with your firm
A shorter cash conversion cycle
Revenue and profit enhancement
These are not incremental benefits. They are transformational. Those who don’t modernize their trade credit operations will find themselves at a competitive disadvantage to their competitors who do.