One Lesson from the 2023 Banking Crisis: Cash is Still King

Is your business financially secure? 

It’s a question that organizations around the world are asking themselves in the wake of the Silicon Valley Bank and Signature Bank collapse. Our most recent blog post, What the 2023 Banking Crisis Can Teach Finance Leaders, examined some of the causes of the collapse. It also explored risk management strategies that accounts receivable teams can adopt, such as establishing a firm credit policy and crafting an effective dunning process that tackles overdue payments. 

But there are further steps that finance leaders can and should take to ensure their security. And it all comes down to cash.  

“The first line of defense should always be cash.” – Lazetta Rainey Braxton, member of the CNBC Financial Advisor Council  

From Liquid Assets to Cash 

There is a direct link between how an organization handles accounts receivable and its liquidity.  

Liquidity: the efficiency or ease with which an asset or security can be converted into ready cash without affecting its market price.  

Accounts receivables are considered a liquid asset because they represent a legal obligation on the part of the customer to pay their debt. That said, they are an unreliable asset because there is always a chance that the invoice will go unpaid, or not completely paid.  

As noted in last week’s blog post, Dun & Bradstreet has found that an invoice that is 90 days past due only has a 69.6% chance of being paid and decreases steadily from that point on. If it goes as far as a year, that likelihood drops to 22.8%.  

This underscores the need to rapidly transform accounts receivable into cash. This is the most reliable asset to ensure your organization is able to meet its financial obligations. That means adopting strategies that will speed up the order-to-cash (O2C) process. 

Organize Your Invoices 

One of the first, and simplest, tasks an accounts receivable department can undertake to improve their receivables is to organize their invoices into aging buckets. The typical groupings look like this: 

• 0-30 days past due 

• 31-60 days past due 

• 61-90 days past due 

• 91-120 days past due 

• Over 120 days 

As a general rule, you’ll want to focus your attention on the oldest invoices, as they represent the highest risk of going unpaid. Gaining a better understanding of your AR aging will help improve cash flow forecasting, credit approval policies, the efforts of your sales team, and an estimation of accounting reserves for bad debt. While these reports can be created manually in a spreadsheet, adopting automation software with comprehensive reporting capabilities will allow you to make the process less labor-intensive.  

“Quadient AR instantly enables my team to see our customers' days payable metrics. This has been invaluable in providing insight into our cash flow, helping us anticipate challenges and make informed decisions when increasing credit limits. Having this capability throughout the COVID-19 pandemic has been a game changer.” 

Eben Paul, Chief Financial Officer, Mammoth Carbon Products (and Quadient AR customer) 

Put Technology to Work for You 

Smart technology is increasingly being employed to help manage the O2C process. In particular, accounts receivable departments are looking to advanced tools like artificial intelligence, machine learning and predictive analytics to underpin their AR strategies.   

Predictive Analytics - a form of business analytics applying machine learning to generate a predictive model for certain business applications.  

When employing predictive analytics to customer payment behavior, past payment data is analyzed to assess the likelihood of an invoice being paid on time, as well as when it is likely to be paid. Using this information, accounts receivable representatives can plan their collection strategies, focusing on accounts that have been found most likely to pay late.  

“…predictive analytics can help AR teams put a significant dent in delayed payments, missing invoices and other expensive and time-consuming obstacles. The time and money these processes and technologies save can be put toward spotting and fixing other AR challenges.” – PYMNTS.com  

Embrace a Longtail Approach 

Time is limited, and that means that you can’t afford to treat every invoice the same. High-dollar invoices must be prioritized, as they have the greatest impact on your cash flow.  

The 80/20 Rule – 80% of your revenue likely comes from 20% of your customers 

When accounts receivable teams employ a long tail approach, it typically involves letting automation handle the bulk of your customers, who are likely to be responsible for the smallest amount of your revenue. By letting technology do the heavy lifting, AR reps are then freed up to provide specialized attention to the remaining 20% of accounts that account for the bulk of your revenue, helping ensure that the payments are handled quickly and smoothly so there’s no disruption to your cash flow.  

Don’t Forget this Vital Practice 

The lower your days sales outstanding (DSO), the higher your liquidity and cash flow. Unfortunately, one of the keys to a better DSO is a practice that many companies simply ignore: AR reconciliation. 

Reconciliation - accounting process that compares two sets of records to check that figures are correct and in agreement. 

Despite its vital nature, as many as 19% of businesses surveyed by Citi stated that they didn’t view the practice as important. That leaves them vulnerable to cash flow disruptions. 

AR teams should reconcile at least once a month, typically as a part of month-end, before the numbers are released. It helps ensure that the reports contain no material inaccuracies.   

Teams can begin the process by updating all transactions for the period being reconciled, and then run an aged trial balance report, which will help eliminate discrepancies in your total ledger and an AR aging report.  

When variances are found, they must be immediately investigated and corrected, with adjusted entries being made.  

Keep the Cash Flowing 

Each of these practices will help optimize your O2C process, turning your accounts receivable into tangible cash in your bank account. It’s a simple and effective way to protect your company’s financial future.  

To learn more about optimizing your order-to-cash performance, download our white paper, The Essential Guide to DSO.