In the current climate of economic uncertainty, as projects are postponed and payment terms extended, banks remain reluctant to lend to businesses. For SMEs, this means finding new ways to raise capital. Looking internally and adopting a sustainable approach to working capital has become the optimal way to lay down the foundations for future growth.

This article was written by David Taylor of OnGuard, an independent Dutch company that offers software and services for credit and collections and query management. OnGuard, which was established in 1992, supplies credit management solutions to both local and international customers in large and complex credit management environments, as well as in small and medium sized enterprises.

In the current climate of economic uncertainty, as projects are postponed and payment terms extended, banks remain reluctant to lend to businesses. For SMEs, this means finding new ways to raise capital. Looking internally and adopting a sustainable approach to working capital has become the optimal way to lay down the foundations for future growth.

Many SMEs recognise that improving working capital can promote company growth and profitability. Cash flow constraints can shake the foundations of even the sturdiest companies and, with the outlook for 2012 still uncertain, financing is being squeezed from all sides. Yet current strategies often overlook the significant role accounts receivables can play in reducing the cost of working capital while also having a positive impact on customer relationships.

The danger of short-term fixes

Conventional approaches to managing cash flow have traditionally focussed on short-term strategies such as prolonging accounts payable and stripping out costs. Although withholding payments can, in the short-term, improve liquidity, this does not help long-term sustainability as the monies owed will eventually be collected. Indeed, recent research has found that billions of pounds are unnecessarily tied up in the working capital of small and medium companies due to the withholding of payments.

Small and medium-sized firms cannot ignore the detrimental impact that withholding payment can have across the supply chain and throughout the wider economy. Every delayed invoice has a knock on effect on the company next down the supply chain. For SMEs, where margins are typically tighter, the capital resource required to manage a late payment may simply not exist.

These are only short-term solutions to renewing cash flow, and it is accounts receivable where the greatest untapped opportunity for innovation in sustainably optimising working capital lies.

Accounts receivable is often the largest entry on a balance sheet but has traditionally been approached as more of an administrative concern. Unlocking the value of this entry can directly improve a business’s profitability by reducing the financial risks posed by write-offs and late payments, and at the same time enhancing the relationship with the customer; at the heart of which are the credit, collections and complaints functions.

A wholesale rethink across these processes is required if businesses are to handle working capital with a much more strategic and customer-centric approach to credit, collections and complaints. When done successfully, businesses not only keep cash flowing through the organisation, but can free-up funds to build for future growth.

A transparent and customer-centric strategy

So what does a customer-centric and strategic approach to credit, collections and complaints management entail exactly? First, it is about recognising how accounts receivable management operates at the very heart of the supplier-customer interface. By understanding and analysing customer behavioural information using qualitative analysis, detailed reporting and KPIs, it is possible to segment the customer base and apply appropriate action profiles to minimise payment times. This reduces Days Sales Outstanding (DSO) and allows firms to identify and target the weakest customers to enable informed decisions on the terms and conditions to be applied to future transactions.

Second, the ability to segment customers also allows firms to define a tailored collections strategy per group to reduce risk and improve customer relationships. Collection terms should be discussed and agreed from the very outset of a relationship and then applied consistently throughout. A disciplined and structured approach to collections again reduces DSO and improves cash flow, whilst nurturing a much closer customer relationship. Naturally, this also provides more scope for flexibility in the collections process if required.

Lastly, by combining multiple sources of external and internal credit information, it is possible to predict the bad debtor of tomorrow. Every customer should be evaluated regularly for risk and analysis of their payment history and behaviour provides the key risk indicators. For example, if every complaint raised by a customer is spurious, this is a sure sign that something is wrong. Using historical data to analyse root causes for complaints allows a firm to both identify and counter illegitimate complaints at an earlier stage. More importantly, it allows a business to modify internal processes and procedures. Long-term structured complaint analysis leads to improvements in logistics, services, and administrative processes. The result is fewer complaints, improved payment times and reduced write-offs.

A valuable aspect of doing business

For many businesses, credit, complaints and collections management are still functions considered to be outside the focus of senior management. But at a time when there is much greater scrutiny of a firm’s accounts receivable and its true value in respect of how much is actually tied up in high-risk customers, a good credit, collections and complaints policy is no longer a luxury and is certainly not a burden for companies looking to reduce the cost of their working capital. It is a valuable aspect of doing business that provides tangible financial and operational benefits.

It means that supplying the customer no longer ends when the product or service has been delivered. A customer-intimate credit, collections and complaints manager not only clears the path to payment and improves accounts receivables, but can form the strongest of bonds by understanding and analysing customer behavioural information to ensure the relationship is sustained. This ensures that all business functions can apply a consistent approach to managing the customer relationship with the ability to identify early on exactly why payments are being delayed, and allow an informed and timely response in accordance with the customer’s profile.

Maintaining a 360-degree view of customer relationships and elevating accounts receivable to a strategic level ensures transparency throughout the company – from the collections department, all the way to the CFO and MD. If SMEs can optimise working capital in this way, they give themselves the best possible chance to achieve sustainable growth and build towards long-term success.