The recruiting short cut to improve cash flow and liberate working capital

As businesses grapple with recruitment challenges during the “great resignation,” shortcuts and savings on recruitment needs have an increased importance.

This article addresses the challenge of improving cash flow through better working capital management without the need to recruit more accounts receivable (AR) staff.

Improving cash flow is ever more important in a world recovering from the economic shock and uncertainty of the pandemic. But it’s not just the cash inflow that matters; Free cash flow is one of the most important metrics business owners and CFOs seek to improve. Certainly, profit margin is important, but scaling sales to produce more free cash flow is one of the strongest indicators of a healthy business.

Liberating working capital can dramatically improve free cash flow, so let’s find out how to do this without the need – or costs – of raising headcount. But first, a quick refresher on the importance of cash flow and problems that occur, before we outline a recruitment-free solution.

From small business to enterprise – Cash is King

There’s a saying – “Turnover is vanity, profit is sanity, but cash is reality.” Ask anyone who worked at Enron, Carillion, or countless others who overstretched their cash reserves.

It’s not just start-ups who face cash flow challenges to support business growth. Every CFO wants to improve cash inflow speed and volume to improve liquidity and support growth.

Business finance needs to strike a careful balance between improving cash position through positive cash flow with the need to reinvest cash for growth. Liberating working capital from areas such as the accounts receivable ledger by shortening payment timeframes can improve cash flow, but typically requires investment in people, process, and technology to achieve this.

What causes cash flow problems

Cash flow problems occur when current liabilities exceed cash on the balance sheet. Meeting these financial obligations without late payments may require external funding to raise the cash needed in time.

Raw materials may need to be purchased, processed, and sold before the supply chain can be paid. When credit is available with favorable payment terms, debtors should have no problem with making payments on time. Cash flow problems occur when debtors over-extend themselves and are left without sufficient liquidity to settle their financial obligations in time.

Credit control departments seek to evaluate and mitigate credit risk by offering appropriate levels of credit to support buyers’ needs, within their means to make payments on time. But sometimes unforeseen circumstances (something we are all too familiar with in the 2020s) can lead to cash flow issues!

Liberating working capital from the AR ledger

Businesses have a few levers to optimize cash flow management; from holding on to payments longer (increasing days payable outstanding or DPO), to streamlining inventory so less cash is tied up in stock, and bringing in payments sooner through reduced days sales outstanding (DSO).

Inventory management for a shorter cash conversion cycle isn’t always a viable option to improve cash flow, and extending DPO can hurt important supply chain relationships. So many businesses look to reduce DSO and liberate working capital previously trapped in the AR ledger as their lever of choice.

Shorter payment terms are one route to DSO reduction, but may run contrary to the credit terms that sales teams use to entice buyers. Alternatively, businesses may choose to offer their buyers incentives for early payment to reduce DSO. Also, anything that can be done to improve speed and accuracy of invoice delivery, or simplify the payment process, can contribute to reducing DSO.

However, improvements in DSO typically require investment in people, process, and technology – not ideal when recruitment is already a challenge. So what options exist which do not place a burden on recruitment or create other internal overheads?

Invoice factoring and invoice discounting to improve cash flow Issues

Invoice factoring, a form of invoice finance, is one common approach to rapidly liberate working capital from the accounts receivable ledger. Factoring involves the sale of the AR ledger to a third-party to collect debt. While this does present a swift and streamlined solution to improving cash flow, the third party has less vested interest in treating debtors with the level of respect and customer care you may want them to experience.

Another option to quickly liberate working capital is to work with an invoice discounting provider to obtain a business loan equivalent to the value (or most of the value) of your AR ledger. Invoice discounting is borrowing that uses the receivable value as collateral. The advantage of this over invoice factoring is that lenders are not involved in the collections process, so the seller maintains full control.

Both forms of invoice finance come with pros and cons that may suit some businesses more than others. A more detailed examination of their differences can be found in this article on what is invoice finance.

Accounts receivable automation for improved cash flow

Automation of accounts receivable processes, or AR automation, is looked to as one of the primary areas for efficiency gains in the order-to-cash process. Automation of invoice delivery and associated communications frees up staff to work on more complex and sensitive issues relating to invoicing and collections.

AR automation solutions bridge ERP systems, accounting software, and the delivery and payment process for invoicing. These changes are often embraced with a drive to more electronic delivery, even automating the connection to clients’ accounts payable portals – removing the need for manual invoice uploads.

However, these efficiency gains can come at a cost. Setting up AR automation can be a complex job for internal teams, relying on investment in new technology and IT resources, as well as adjusting to new ways of working.

Managed services to reduce recruitment burden

With that, we come to the crux of this article; How to achieve the goal of improved cash flow by liberating working capital without the need to recruit skills, experience, and bandwidth to facilitate improvements in driving down DSO.

But, how to drive down DSO in the midst of a recruitment crisis?

One of the most effective ways to achieve the process changes you need is to work with a managed services provider. Rather than buying a technology solution your IT resources will need to deploy, managed service providers can deliver people, process, and technology as a single package – one you don’t need to recruit for.

But the path to guaranteed DSO reduction is about more than simply reducing staff overheads for process improvement. Investment in people, process, and technology as a managed service can likely reduce your DSO, but you are buying a service, not a guaranteed outcome.

For guaranteed DSO reduction, and the associated benefit of improved liquidity through liberation of working capital, businesses do have a sure-fire solution. You can actually buy the business outcome of a specific DSO (e.g. 15 days).

Corcentric Managed Accounts Receivable (Managed AR) works as an extension of your AR team to provide the benefits of AR automation, electronic invoice delivery, online payments, and a white glove collections process – seen as part of your team, not being facilitated by a third party.

But, most importantly, Corcentric ensures you are paid for all invoices within your desired timeframe. You are buying a guaranteed business outcome, without the need to recruit, train, and manage the staff.

Eliminate bad debt with a non-recourse guarantee

A guaranteed business outcome of reduced DSO may sound like an impossible dream – what about bad debt from unpaid invoices? Say goodbye to any requirement to pay for defaulting debtors, because Managed AR is provided as a non-recourse solution.

Corcentric Managed AR differs considerably from other approaches to drive down DSO: Corcentric absorbs the cost of late payment or even bad debt as part of the service offering. In this regard the DSO is guaranteed and fixed, not just as a solution to address short-term business needs without the recruitment burden, but to also provide long-term assurance of cash flow.

If you’re ready to liberate your working capital to dramatically improve free cash flow without the costs and delays of raising headcount, let us show you how Corcentric Managed Accounts Receivable can help you achieve your guaranteed business outcomes.

Get in touch to find out how Corcentric can quickly and easily help you improve your working capital and cash flow.