Automated Accounts Receivable Solves Top 3 Profitability Concerns for Manufacturers

Study indicates nearly 50% of profitability worries for manuafacturers can be met with automated accounts receivable.

According to the September 2014 Atradius Payment Practices Barometer, companies across industries were most concerned with maintaining adequate cash flow, falling demand for products and services, collecting oustanding receivables, and bank lending restrictions. The report dug into specific industries to reveal which of these represented the largest profitability worries in specific industries. The survey results indicate that by automating accounts receivable, manufacturers specifically can ease their concerns in the coming year.

Top 3 Profitability Concerns for Manufacturers in 2014

Collecting outstanding invoices: 24.89%

Collecting outstanding A/R  involves much more than sending an invoice, getting a check, and recording the payment; there are many more steps involved if you want to get paid on time. Some of those steps must be taken even before a sale is made, such as checking customer credit worthiness. From there you will need to get the invoice out quickly, correctly, and to the right person (it seems easy, but the report also found that 22.9% of invoices were paid late simply because the invoice was sent to the wrong person). Once the invoice is sent, communication is extremely important to confirm invoice receipt with the customer, remind them of upcoming due dates, and notify them as soon as possible after an invoice goes beyond terms.

This report reveals the real cause for concern in this area is a lack of focus on some of the most important factors of a successful A/R management strategy. These factors include communication with customers, extending credit only to those customers who deserve it, and monitoring credit risk over time as financial situations change. The survey indicated that:

  • 18.27% of manufacturing companies send dunning letters (payment reminders) to customers.
  • 47.72% of manufacturers check customer creditworthiness.
  • 51.27% monitor credit risk

It’s likely these above steps were not taken because they are extremely time consuming and that’s where automation comes in. With accounts receivable automation software you can put each of the above steps on auto-pilot to ensure customers and collectors alike are always aware of what is due, when it’s due, and what needs to be done to get it paid on time. Companies can also use the system to manage credit applications and simplify the process of monitoring customer credit worthiness on an ongoign basis. Learn more about automated accounts receivable here.

Maintaining adequate cash flow: 24.89%

Cash flow is critical for a manufacturing business and it’s no surprise that it’s among the chief concerns in this industry as it is in many others. The health of your cash flow depends heavily on collecting invoices on time and then balancing that with your expenditures. This of course is easier said than done since forecasting cash is never easy, especially when it comes to the A/R side of the balance sheet. Managing payables, while it’s not exactly easy, is far less complex than trying to figure out which customers will pay you early, which will pay you on time, and which will pay you late (and how late they will be). Accounts receivable management software makes things quite a bit easier when you choose a solution with built in cash forecasting tools that work off of past customer behavior. With the right tool you will be able to forecast cash inflow based on more than due dates and average DSO for a much more accurate forecast so you can plan accordingly for healthier cash flow.

Dig Deeper: How to Improve accounts receivable forecasting

Falling Demand for Products: 28.38%

Falling demand for a product is a manufacturers worst nightmare- but there is a reason sales/demand are dropping. Maybe you need to market more heavily, invest in technology to increase production, hire additional sales employees, lower prices, invest in R&D for new products, etc. Whatever the case may be, it’s going to take an investment. As we have learned above, focusing on accounts receivable management is a good way to get access to the working capital you need to make these strategic moves, but finding the time to focus on this area of your business is not easy when you rely on manual processes such as spreadsheets and aging reports as most manufacturers do.

Are you staffing your accounting department appropriately for optimized receivables? If cash flow is a concern, you may not want to take on the additional overhead for a new employee. The good news is that you may not need to!  Automating accounts receivable is like hiring another full-time employee without the additional overhead.

Dig Deeper: How many employees do I need for effective accounts receivable?

Will automated accounts receivable really help you put these worries to rest?

Industry Analysts Paystream Advisors conducted a study, and the results indicate that companies with automated accounts receivable are realizing:

  • 10 to 20 percent reductions in daily sales outstanding (DSO)
  • 25 percent reductions in past due receivables
  • 15 to 25 percent reductions in bad debt reserves
  • ROI in as little as 2 months.

Those percentages sounds great, but what do they mean when applied to the real world? To illustrate, let’s look at a few examples:

  • On average, companies write-off 4% of accounts receivable as bad debt. For a 10 million dollar company, that means they are writing off $400,000 each year.
    • If this company implemented accounts receivable management software and realized a marginal 10% reduction in bad debt reserves, they could save up to $40,000 a year; cash which could certainly be used for growth, investment in capital equipment, employee salaries, etc. to help you address your worries about falling product demand and cash flow.
  • On average, companies have credit terms of just 28 days, but average DSO is 61, more than double the agreed upon terms!  According to Paystream Advisors, if these same companies were to implement accounts receivable management software and recognize a reduction in DSO of 10-20%, they would have a DSO between 49-55 days– over a week faster!

Ready to learn more about automated accounts receivable? Visit our resource library where you can see product demonstrations to learn what life would be like with automated invoice collection, read customer testimonials, read more research, and much more. Click below to get started.

Automated Accounts Receivable

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