As finance professionals, we’ve often heard the term “cash is the lifeblood of a business” and there’s no time when that reality sinks in more than at the end of the month when you have vendor payments due, payroll to process, cash tied up in inventory and customers who are slow to pay their invoices. Things get even more interesting if your banker is still haunted by the financial crisis and is reluctant to make short-term financing available. For some businesses the situation can be even more dicey because you don’t have much negotiating power over vendors (when was the last time you had the luxury of actually “stretching” payables?) and you can’t risk souring the relationship. At the same time, it’s always uncomfortable to initiate collections activities against customers who don’t pay their invoices on time. However, every business has its limits and chronic “cash crunches” stress the business too much and push the risk envelope. The first remedy is prevention. More sophisticated businesses treat their potential sales on account as a bank would when evaluating a loan; through a careful analysis of the customer’s financial situation and perhaps using external ratings to assess how diligent they are at paying their bills on time. Other businesses may monitor customer accounts and set limits on how much outstanding trade credit a particular customer can accumulate. They may even go so far as to block pending sales until the amount of outstanding invoices is brought under a pre-determined threshold.
This is very prudent and effective. But what happens when the goods have already shipped or the services have been rendered and payments are late? SAP Financials OnDemand, our new cloud-based financial management system, provides rich functionality that helps companies effectively manage their accounts receivable through greater visibility, forecasting and by automating dunning activities. The first part of the cycle involves knowing where you stand. The system has rich, real-time reporting capabilities that allow you to run receivables aging reports and group them by specific date ranges or “buckets” such as 30, 60, 90 and 120 days overdue. The same capabilities also feed into the system’s Cash Flow Management module which provides your finance staff with robust and highly accurate forecasts involving expected sources of cash, uses of cash and real-time (through electronic download) bank balances. The system also forecasts the impact of discounts on not-yet due receivables to help your cash managers get a very accurate picture of their situation now and in the future.
Next, when it’s time to execute dunning activities, this is easily accomplished through SAP Financials OnDemand’s Receivables work center. Before actually initiating action against a particular customer, the system allows you to view the customer’s status including both current and overdue items, their balances and particular document (invoice) number. If your business is in the unfortunate situation of having several overdue accounts, SAP Financials OnDemand can automate the entire process by grouping them into a “dunning run” using the periodic tasks menu. In setting up a dunning run, the system generates dunning letters that can be customized and include specific data such as the balance due. Finally, the dunning run is executed in automatically in batch mode on the date you define.
Cash is certainly king for all businesses and your financial management software can play a big part in automating your dunning activities aimed at reducing days sales outstanding and increasing cash flow.