September 9th, 2022
Steady cash flow is essential in an economic recession
How do we know if we are in an economic recession?
A recession can be defined as a significant, widespread, and prolonged downturn in economic activity. Because recessions last six months or more, one rule of thumb is that two consecutive quarters of decline in a country’s Gross Domestic Product (GDP) constitutes a recession. In the United States in the first half of 2022, there have been two consecutive declining quarters of GDP.
With the hangover of the pandemic still enduring for small and medium-sized businesses, the global supply chain recovering, stock markets fluctuating, and the war in Ukraine showing no sign of ending. Times are very challenging for companies who are trying to survive and make a profit in this climate. The world could be on the way to an economic recession. Steady cash flow is essential during these times.
Why it’s important to be on top of receivables during an economic recession
Having strict and consistent financial workflows in place during a recession is key to resilience. Getting paid as fast as possible and having that money in company bank accounts is the overriding goal. A company needs to stay on top of its outstanding accounts receivables in order to maintain a steady and reliable flow of cash.
Cash flow is one of the leading metrics in analyzing the current health of a company. If a company has poor cash flow, it will more than likely have a higher than average rate of Days Sales Outstanding (DSO). Being able to plan for the future of the company, while using current capital is a lot healthier for an organization than borrowing money at high interest rates. Being self-sufficient is a good barometer for success, getting your AR process streamlined is the best way to achieve this.
What are the challenges to maintaining a steady AR cash flow
The AR process can be challenging for a variety of reasons that we are now going to look at in more detail.
- Slow customer payments: Some customers may have different payment terms depending on their size and the amount they owe. Customers also have unique payment habits, which means some will pay on time all of the time and some will pay late most of the time. These habits will affect your company’s DSO and cash flow.
- Deductions Management: Customers can make a reduced payment of the invoice which is known as a deduction, this can be done for a number of reasons. Such as damaged goods or late delivery, they may decide to only pay 80% of the invoice total. It is up to the supplier to investigate if this is a legitimate claim and to take action accordingly. The loss to the bottom line can be significant.
- Economic volatility: Will a customer be able to make a payment? Maybe the industry they operate in will be directly affected by an economic recession. Will they become a bad debt due to this? It is important to be able to understand if this will be the situation.
- Difficulty in forecasting: Analysing customer payment habits and patterns is usually a good way of understanding when they may pay the invoices. However, these payment predictions can be significantly impacted during an economic recession.
- Use of manual methods and processes: A huge amount of companies still rely on manual processes and insufficient tools for maintaining their AR. Spreadsheets, in-house custom creations, limited ERP functionality, and processes that worked twenty years ago, are the most common that we have encountered.
How can technology help organizations navigate an economic recession?
The use of Accounts Receivable software can help organizations improve many aspects of the AR process. Streamlining the AR process allows companies to get paid earlier and more consistently, reducing DSO figures while also achieving a strong and steady flow of cash. Below are some of the key uses and benefits of AR software that will help companies to navigate an economic recession.
- Having a streamlined AR process is key to having a steady cash flow.
- Having consistent cash flow in your company is key to long-term company health.
- Predict payments correctly using historical payment data.
- Focus on high-risk customers instantly through risk analysis.
- Faster speed of processing – higher automatic matching rates, reduced DSO.
- Improved AR accuracy – removes manual errors that cause real problems.
- Deductions management process improved – more cash reclaimed for the bottom line.
Contact Us
If you would like to discover how Cashbook can help automate the cash application process. Please contact our team by calling +353 61 338 400 (International) or 630-352-2228 (North America). Alternatively, you can email info@cashbook.com. We look forward to talking with you and helping your company realize the benefits of cash automation technology first hand.
