The myriad headwinds corporates continue to wrestle with in 2019 show little sign of receding, with rising trade tensions and political uncertainty applying added pressure on businesses around the world. Couple this with increased competition across multiple industries, with many companies looking to cut back on spending to offset declining profits, corporate treasurers certainly have their work cut out for them over the months ahead.
In this environment, corporate treasurers’ need for strong working capital management solutions has never been greater, with businesses ideally looking to receive cash as soon as possible in order to reduce costs in the working capital cycle.
However, much of the focus from many software vendors has centred around increasing the speed of the payments and too little attention paid to enhancing cash collections and receivables.
“Everybody still gets a bill with a thirty-day payment cycle. Why?” Ramamoorthy Rajagopal, Senior Vice-President of Finance at Malaysian-based telco, Axiata Group, said at the CT & CFO Malaysia summit in Kuala Lumpur. “We pay approximately 3% for every 100 bucks we collect on the post-paid side.
“After some point of time, the cost of collection is more expensive than my own cost of borrowing,” he said. “At Times, we pay almost 18% to collect cash which is overdue.”
The messy business of collecting cash
For businesses large and small, generating sales is hugely important. But what often separates successful companies from those that end up on the scrap heap usually comes down to which ones are best at managing cash flow. After all, “a sale is a gift to the customer until the money is in the bank,” Atari founder and creator of the Chuck E. Cheese restaurant chain Nolan Bushnell once famously said.
It is common when it comes to accounts receivable collections to take anywhere from 30 to 120 days from the point of sale for the funds to arrive in a company’s bank account, with many businesses and retail customers taking their time to pay up.
Because of this tiresome, but all too common trend, it is worthwhile for all business owners to make inflow and collection a priority.
“Cash inflow is the best gauge to develop when analysing operations cash flow,” said CEO and founder of 9th Gear Technologies Maryanne Morrow in Forbes Finance Council post. “Companies should watch accounts receivable and days sales outstanding closely, and they should also offer early payment discounts and be pleasantly persistent in collections.
“Remember, your good customers want you to win too, and setting payment expectations early will keep operation cash flow in check,” she added.
Early payment discounts?
However, no matter how much a company champions its inflow and collection processes, it’s never easy, with customers often having their own cash flow management problems, leading to them being prickly when hassled about payment.
With many software vendors focusing on the pace of payments over the speed of collections, it is increasingly up to treasurers to improve their own in-house processes to enhance their cash flow.
One easier solution worth considering if a business is suffering from cash flow problems is early payment discounts. By offering customers a discount of up to 2% on their invoice if they pay early, rather than on the deadline date, treasurers can benefit from a significant cash flow boost at the expense of slightly smaller end payment.
However, as Jorge Henao, a consultant at the Business Development Bank of Canada (BDC) explains, early payment discounts are not always worth it.
“If your customer is paying you within 30 days, it most likely doesn’t make sense from a financial point of view,” Henao says. “As well, if you decide to stop giving the discounts, it might encourage your customers to start paying late.”
Request to Pay revolution
In the UK, treasurers won’t have to worry about hurting their bottom line to improve their cash flow much longer thanks to a revolutionary new payment messaging service set to launch in August this year, known as Request to Pay (R2P).
The new service sits on top of the existing payments infrastructure, providing a new and highly flexible way to settle bills between businesses and organisations. Each R2P request will allow the payer the ability to pay in full, in part, ask for more time or even decline to pay – opening a real-time dialogue between the two parties involved in a transaction and making the payment process a truly two-way street.
For a while now, software developers have been testing the service and optimising it for businesses to shape the future of payments in the UK and giving treasurers enhanced collection capabilities.
“R2P is first and foremost a concept which importantly is also able to offer instant, real-time and account-to-account payments and moves a long way beyond the traditional invoice as we usually know it,” Senior Product Manager at Nordea, Danny Pedersen, said.
“In the future, R2P can penetrate and leverage payment processes across different segments adding a dynamic aspect of instant, real-time payments made directly from a person’s account.”
However, to reach this holy grail of payments there is still a lot of work to do. To make payments in real-time on an account-to-account basis software developers will need to beef up new sercices to enable an end-to-end model from a merchant perspective.
“Right now, what we do see with R2P is that transaction costs will be lower and the customer experience will be higher. R2P has a huge potential and we are on a journey to move it from a country to a Nordic solution, and into a full range of segments,” Pedersen added.