Working Capital In The Age Of Digital Finance: Accounts Receivable

Claudia Tewald

Part 3 in the 4-part “Working Capital” series

There is no question that accounts receivable can influence and improve working capital. Just getting the money faster from the customer can reduce the days sales outstanding (DSO). But this is easier said than done, especially when there is no clear insight into the customer situation and processes are not automated.

Unfortunately, in a lot of companies, this is still the case. Disputes are handled outside of systems, communication with customers is recorded on spreadsheets, maybe saved on a shared drive, or even worse, on a local drive. It is almost impossible to perform cash collection efficiently in this case.

Dispute resolution

System-supported dispute management helps to optimize dispute resolution. In obvious cases, such as short payment, a dispute case could be created automatically and information relevant to the case automatically captured. The key is that each dispute has a coordinator and a person responsible. The coordinator can track whether the processing deadlines have been met and can escalate overdue dispute cases. Usually a dispute case is processed by several persons across different departments. Important is in this regard is that the entire dispute resolution can be monitored and captured in the system. A shorter dispute-resolution time will improve the collection process and working capital.

Collections specialists should focus on the most important outstanding receivables. The priority depends on the collection strategy, which is influenced by the overall company strategy. Discussions and negotiations with customers regarding outstanding receivables like resubmissions, promises to pay, and other information must be captured in the system.

Credit management

Besides efficient collection and dispute handling, efficient credit management will also impact working capital positively. Good credit management decreases the risk of uncollected receivables. Credit decisions should be based on internally determined factors such as the customer’s payment behavior, number of disputes, and external information. Customers should be classified based on this information. Credit limit should be flexibly adjusted in case of changes of credit-relevant information. Ongoing monitoring of credit-limit usage and credit exposure, identifying early warnings, and if necessary, hedging business transactions for high-risk customers, are also part of efficient credit management. It is also crucial to share credit information with sales and marketing so that those sales activities can be planned accordingly. Why not consider focusing sales and marketing activities on low-risk customers with excellent payment behavior?

Highly automated processes, one single source of truth, and real-time information are all key for successful accounts receivable. The next blog in this series will explore inventory management and its role relative to working capital.

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Claudia Tewald

About Claudia Tewald

Claudia Tewald is a business enterprise principal consultant and has worked for SAP Consulting for more than 14 years in the area of Finance and Controlling. She has been supporting companies in their financial transformation and in designing their future finance IT architecture and road map.