While they're often used interchangeably, accounts receivable (AR) management and credit management are not one in the same.
The AR process begins once an invoice has been sent and a supplier strategizes the payments follow-up process. According to Peter Janssens, founder and CEO of credit management software provider iController, credit management encapsulates a much broader effort fueled by cash flow management and customer relationship strategy.
It's a concept that "includes all steps taken to protect cash flow, such as determining contractual terms and conditions, setting payment terms, determining credit risk and setting credit limits," Janssens recently told PYMNTS.
Such a broad-reaching initiative is one that faces some obvious benefits from automated technologies. But as Janssens explained, both the value and challenges in elevating credit management processes aren't always understood but every business.
Shifting Credit Strategies
Wielding data analytics and automation technology in order to improve everything from establishing trade credit limits to finding success when reaching out to clients with unpaid invoices can present clear benefits for corporates' overall cash flow strategies.
Some of the more immediate benefits organizations encounter are the ability to identify patterns in customer payment behavior. Automated software can provide a quick, updated view of the current status of outstanding invoices, a simple but powerful insight Janssens said is often obtained through manual spreadsheets. This view provides visibility into which corporate customers tend to be on time, early or late, and it can provide analysis as to the average number of days a company will allow their invoice to go past due, for example.
But the knock-on benefits of automated credit management go deeper, he noted, and can help organizations revise their overall cash strategies.
Automation technology that can send out payment reminders not only means professionals have freed-up time for more value-added activity, it also means a different approach to collections can be supported.
"Software enables you to determine — for each customer — when and through which channel you will be most successful in sending out reminders, and which customers need to be prioritized," said Janssens.
He added that while, often, controllers will "intuitively aim for quick wins," i.e. go after accounts with the largest outstanding balances, automation can help businesses more efficiently go after more accounts with smaller outstanding balances, which can often collectively represent a greater amount of incoming cash.
Janssens also highlighted the challenge of manually sending out payment reminders. Not only do professionals have to send out those messages, but they have to reply to all incoming responses, further limiting their ability to focus on more strategic initiatives. Automation software can help businesses stagger those reminders to promote efficiency, he noted.
Automation in areas like credit underwriting can also mean enhanced risk mitigation, which not only means invoices are more likely to be paid (and paid on time), but also offers firms the opportunity to save money on trade credit insurance.
Finally, strategic and automated credit management not only means accelerated cash flow, but it also promotes satisfaction for both customers and employees.
Understanding The Challenges
While automation software can deliver efficiencies with many value-added benefits, data analytics technology is often only as good as the data that feeds into it.
It's one of the biggest challenges to automated credit management strategies today, said Janssens, although he noted that technology is also increasingly able to overcome the friction of unstandardized, less-than-perfect data.
With customer relationships such an important component of the credit management strategy, Janssens also pointed to the hurdle of accounting for variations in the ways that business clients want to be contacted and ultimately pay invoices. This is particularly true for organizations with a global reach.
"For example, in different parts of the world there are major differences in how businesses send reminders and dunning letters," he said, pointing to the use of physical paper in the U.S., compared to growing adoption of Registered Email technology in Northern Europe.
"In the U.S. and Europe, customers often opt for online payments or bank transfers," he continued. "In the Middle East, on the other hand, customers prefer traditional checks. Credit management software must therefore be able to cope with these specific preference, especially for companies that have branches in multiple countries."
Technology will also have to cope with the reality of faster and real-time payments. While Janssens noted that this means technology must be able to more quickly match and reconcile payment and invoice data, real-time payment capabilities will not necessarily change B2B payment timing as organizations continue to strategically delay payment based on their own cash flow needs.
But perhaps one of the largest hurdles of all in elevating credit management strategy is a lack of understanding as to exactly how such tools can transform corporates' overall financial positions.
"Companies are often unaware that their current process is complicated and inefficient, and therefore don't realize there is still plenty of room for improvement,” said Janssens. “They don't realize they're missing out on a chance to significantly improve their cash flow. After ignorance, underestimation is a major challenge. Companies typically underestimate the benefits of automated credit management."