Cash flow confidence is one of the primary issues currently impacting manufacturing. In fact, Manufacturing Digital noted that 90% of businesses in the sector are experiencing some form of cash flow challenge. That’s a particularly distressing statistic because manufacturing projects often have a large upfront cost and a protracted cash conversion cycle.
A variety of challenges have contributed to the issue, including supply chain problems, rising interest rates, and spiraling energy prices. While some of these external factors are outside of the control of accounts receivable departments, there are practical steps that AR teams in manufacturing can take to improve their organization’s cash flow.
The Connection Between AR and Cash Flow
In a general way, accounts receivable has an inverse relationship to cash flow, which is to say that the higher a company’s AR balance, the lower its net cash flow. That’s because the AR balance represents the money owed to your company that hasn’t been paid.
Accounts receivables are considered liquid assets because they represent a legal obligation on the part of your customers to pay an invoice. However, they are unreliable, because until the customer remits payment, that money is unavailable to you.
Unfortunately, late payments are a common occurrence. In fact, 93% of businesses experience late payments. Even worse? Dun & Bradstreet have found that the later a payment becomes, the less likely it is to be collected.
“An account that is 90 days past due has a 69.6% chance of being paid. After six months, the probability rate drops to 52.1%, and after one year of delinquency, the chance of collecting payment falls to 22.8%.” - Dun & Bradstreet
For manufacturing companies, the ability to meet high upfront payments associated with most jobs is largely contingent on the ability of accounts receivable teams to expedite the AR and collection process.
Easy Payments = Faster Cash
Manual accounts receivable is a chief culprit when it comes to late payments, and this is particularly true when it comes to the actual payment process.
“In most cases, the administrative process of making payments is what puts many prospective payers off. When the process is simplified, you won’t have to ask twice.” – Manufacturing Digital
In other words, manual processes make it too difficult for customers to make payments. Often, customers do not have ready access to their account details and have to spend time digging through paper records, or on the phone requesting invoice copies and balance updates. Another frequent challenge is the inability to pay using their preferred method, or for customers with cross-border payments, in their preferred currency.
Adopting an automation solution allows you to make the payment process as simple as the click of a button. Digital invoices are sent immediately to the relevant team member. A self-service payment portal grants customers comprehensive access to their account details and provides the option to make payments via credit, wire, or ACH, and using their preferred currency. All of which results in faster payments and better cash flow.
“The ease of online payment through the website was very compelling. Customers love the ability to pay online...They click on it and are done in a few seconds.” - Susan LaRosa, Quadient AR user
Clear Communication for Optimized Outcomes
Customers will often tell manufacturing companies that a payment is late because the “transaction is pending.” It’s a brush-off answer that tells you that the customer does not view resolving the payment as a high priority.
There are two simple steps to follow to eliminate this issue. It begins with making sure that you have a clearly defined credit policy in place. As surprising as it may sound, many businesses do not have a written credit policy in place, instead relying on institutional knowledge to make credit decisions on customer accounts.
This is a laissez-faire approach to manage an important AR process. Not only does it increase the chance of error and consequent customer challenges. It can also frustrate other employees and impact efficiency. All of which are bad for business.
That’s why it’s vital to have a policy in place that clearly explains the expectations and customer responsibilities upfront, including the consequences of late or non-payment.
However, the need for clear communication doesn’t stop there. Sending out invoices in a timely manner and regular follow-up are key to speedy payment. If you’re still using manual methods to process receivables, this becomes much more difficult. Mailing out invoices and payment reminders is a slow process, not to mention that communications risk getting lost in transit.
An automation solution allows you to create customizable workflows that are tailored to your customer’s preferred method of communication. Invoices are sent out immediately, as are regular reminders until an invoice has been paid. You can also set up rules that escalate communications in the event of delinquency, ensuring that messages are being sent to the appropriate member of the customer’s team.
It's also important to have a preestablished dunning process in the event that payments continue to be past due. A dunning letter cadence should clearly detail the invoice being referenced, the total amount due — including any penalties or fees incurred — as well the consequences of continued delinquency. It also helps to provide customers with a quick and easy payment link in the dunning communications, so that the customer can easily resolve the payment.
Interested in optimizing your dunning process? Download our collections playbook for 3 proven workflows that get you paid faster!
By establishing a comprehensive communication strategy that stresses the importance of timely payments, AR departments can greatly reduce the risk of late payments, and rapidly resolve them when they occur.
Eliminate Busy Work to Start Working Strategically
Manual accounts receivable is time intensive. Data entry, working between disparate systems, and crafting communications eat up valuable time for your AR team. By contrast, automating the process eliminates the need to manually enter data, transfer information between various software solutions, or search through paper files. Customizable communication cadences allow you to send out communications on a set schedule, so no more time is spent creating individual emails.
Through eliminating time-consuming tasks, you provide team members with the ability to approach collections strategically. An automation solution with predictive analytics can identify customers that are likely to pay late, alerting AR that they may require a more “hands-on” approach to make payments on time.
With centralized data and comprehensive reporting functions, an automation solution also allows you to identify trends and changes in customer payment behavior that can alert you to potential issues. By integrating with your ERP and the rest of your tech stack, you are able to access all process-relevant information from a single location.
Customization capabilities also allow you to build reports based on the key performance indicators (KPIs) that matter to your team, as opposed to being forced into a ‘one size fits all’ approach to reporting. Features like predictive analytics analyze past data like payment behavior to provide warnings of accounts and invoices that are likely to be late. This allows you to be proactive in your approach, reducing the risk of late payments and keeping your cash flow healthy.
Start Manufacturing Better Cash Flow
The challenges facing the manufacturing sector are real, but there are practical steps that accounts receivable teams can take to ensure they don’t impact your cash flow. And it starts with automation.
