With a volatile economy and high interest rates leading to increased borrowing costs, many finance teams will be under pressure to hit their year-end cash targets. And as the December 31 deadline approaches, many conversations will be had about what can still be done to improve your year-end cash position. Outlined in this article are 3 strategies which will accelerate cash collection and give your business the liquidity to thrive and survive in 2024.
The importance of liquidity
Prior to the 2008 global financial crisis and Covid pandemic, liquidity was an often overlooked financial metric. As liquidity means security and stability, it is often perceived to stand in the way of opportunity and risk which are understood to drive growth. However, post Covid and crisis, the importance of financial stability is back on the corporate agenda – and there is emerging evidence that in reality it doesn’t always come at the price of opportunity. Companies with a high level of liquidity, have been demonstrated to actually have greater operational efficiency, and greater profits. It is therefore unsurprising that cash flow it is one of the key metrics businesses review as they approach their financial year end and start planning their business strategies and objectives for the following year.
Ensuring liquidity is complex and requires the interplay of many business functions. It is critical to have strong financial planning and analysis processes in place to ensure visibility of your current cash position and to forecast your future cash flow needs. Sales and marketing have to deliver revenue, whilst operations need to manage inventory. Your need strong credit and collections processes, and an accounts payable strategy that can flex to reduce pressure points. Ensuring efficiency and effectiveness within all these processes will maximise a business’ long-term cash flow and reduce risks and costs.
Row of coins with hand writing graph on target 2023.
How to improve your year-end cash position
However, if your business is looking to immediately improve your year-end cash position, a review of their credit and collections function provides the best opportunity to deliver quick wins. In credit and collections, the volume of activity tends to directly correlate to the results achieved. Therefore, if you increase the volume of activity, you will in most instances increase the volume of cash collected. A tight deadline will also often provide the necessary impetus to make overdue decisions on ageing ledgers or bad debt which could make significant impact on cash collection. Outlined below are three potential strategies to consider:
1. Increase credit-control coverage
It is quite common, particularly for business which work solely with an inhouse team, to have to make strategic decisions over who they touch with credit-control activity. Limitations to human resources can often mean only 20% of accounts are regularly contacted. And, despite the myths, it very rare for these priority accounts to deliver 80% of revenues – in most cases well over 50% of revenues are not being chased.
If your inhouse team are at capacity, an outsourced white-labeled credit-control service will have the flexibility and scalability to help you deliver 100% of your customer base with contact. And with activity delivering results, there is no doubt that this will substantially improve your cash collection prior to year-end.
2. Outsource ageing ledgers
Everyone know the statistics, the greater the age of the debt, the harder it is to collect. If your business is sitting on ageing ledgers that your inhouse team haven’t managed to work yet, the likelihood is they aren’t going to in the foreseeable future and the prospects of collecting those revenues are diminishing. If you want to improve you cash position, it is worth considering outsourcing any ageing ledgers to a debt collection agency. Not only will most debt collection agencies work on a contingency basis, so you will only pay when monies are collected, but their commission rates generally increase as the debt ages, so it makes financial sense to not let any ledgers age further.
With a surprising number of blue-chip businesses sitting on millions in ageing ledgers, simply making the decision to get them collected has the potential to make a substantial difference to a business’ working capital position.
3. Do a deal on provisioned debt
How many businesses write of hundreds of thousands in bad debt each year? This is often because it is too small values to warrant servicing or simply lack of available resource. Whatever the reasons there will be few businesses that do not make an annual provision for bad debt. However, even if your business has written it off there are opportunities to generate additional revenues. The first option is to sell it on – this will generate a guaranteed value but can come with some reputational risk when you release your commercial obligations to your customers into someone else’s hands. The other option is to pass provisioned debt to third party with instruction to do deals within agreed parameters. This will enable you to realise as much revenue as possible, all of which would be upside from your current position- without impacting your commercial reputation.
These relatively simple to implement strategies can substantially improve your cash position within a few months of year end. If you have a challenge meeting your year end cash targets and would like to discuss how Barratt Smith and Brown could help, please contact us now to book a free consultation.
Author: Mark Smith
Director of outsourced credit management solutions providers Barratt Smith and Brown and 4D Contact, and a share-holder in fintech order-to-cash company Invevo, Mark has over 30 years of experience delivering clients strategic order to cash process solutions to meet commercial targets.
