Exclusive Interview: How AR Can Improve Corporate Decision Making

In today’s economy, senior management needs help making strategic decisions involving cash flow, risk, and growth. But what data can your AR team proactively share to help guide your organization’s strategic decision making?

To answer that core question, IOFM sat down with two long-time credit veterans: The Trade Credit & Liquidity Newsletter’s publisher, Bob Shultz, and Editor-in-Chief, David Schmidt.

IOFM: What value can AR bring to the business?

Shultz: “Credit professionals are in a unique position to bring significant value to their company. A well-prepared Credit Manager has a firm understanding of your company, its financial and marketing objectives, its customers, the industries it sells to and economic trends that impact the company’s competitiveness and revenue. A good starting point is to have a transparent view of your AR portfolio.”

Schmidt: “In this economy, a CFO is concerned about two things: cash flow and risk exposures. Put yourself in your CFO’s position and think about the information you could proactively provide that would be most helpful. One useful strategy would be to create a report illustrating the month-to-month pattern in your AR portfolio. If there is a bump in your trendline, identify the primary customers whose invoices are ageing beyond the norm and what you are doing to remediate the situation. This will help the CFO better forecast cash flow.”

IOFM: How can the credit team help identify and mitigate risks?

Shultz: “There are likely to be concentrations with significant risk, or on the flip side, customers where higher credit lines are possible. By communicating specifics to senior management and sales, it can help your company redirect efforts from higher risk customers, or concentrations to those with greater opportunity. Since a primary objective for the credit function is to facilitate revenue, by identifying risks, a credit manager can take proactive action to mitigate those risks with guarantees, or adjustments in payment terms or options.”

Schmidt: “In addition, consider segmenting your AR to identify any segments where risk is increasing. This can be accomplished if, in addition to a credit limit, you have also assigned a risk factor to every account. Total up the outstanding AR for each segment by risk factor (e.g., high, medium, low) every month. Any segments where your exposure to high-risk balances is increasing should then be readily apparent.

“As with the aging buckets, identify the primary customers who are creating the high-risk exposure. Also identify segments where there is little exposure to high-risk customers, as these customers provide an opportunity for generating profitable sales.”

IOFM: What about the pullback in consumer spending? What can AR do to get senior management to better understand market trends?

Shultz: “Consumer spending approximates two-thirds of the US economy. It is the primary source of cash flow for businesses, either directly, or indirectly through customers or suppliers. Tracking consumer spending trends is revealing. The financial results in many industries clearly show the impact of the migration of consumer spending to non-discretionary items such as food, shelter, and transportation expense to get to work.

“A Credit Manager can get the attention of senior management by illustrating how economic trends in consumer spending are impacting concentrations in the AR portfolio. Take fast food chains as an example. If consumers eat at home and frequent fast-food outlets less frequently it affects the outlets’ revenue and financial stability. Trucking companies making deliveries, equipment, or food suppliers, etc. are also impacted. Companies you sell to, or companies in your supply chain dependent on an industry that is in a downturn are likely to feel the financial pressure.” 

IOFM: How would you suggest credit staff avoid analysis paralysis? There’s so many data points one could share.

Shultz: “I would suggest taking the following steps as a starting point:  

1)      Do what is necessary to understand how economic trends are affecting companies you sell to or depend on in your supply chain. Stay up to date through relevant economic, and industry publications, networking, and informational events. Engage regularly with your sales team or other individuals in the company with direct relationships with your customers. They are a great source for what is happening “on the street.”

2)      Review your AR portfolio to identify concentrations that represent risk, or opportunity, and communicate your findings to senior management and sales, providing details on concentrations, customer risks and where there are opportunities.

3)      Take proactive steps to mitigate any identified risks.

4)      Suggest that the same analysis is relevant to your company’s supply chain.”