The pandemic is unlikely to influence their payment behaviour.
- The customers are in a strong financial position and pose almost no credit risk.
- COVID-19 has minimal or no effects on their sectors.
Research has indicated a strong likelihood that coronavirus (COVID-19) plays havoc with the slowing global economy, impacts many key sectors, disrupts global supply chains, and reinforces an upward trend in global insolvencies (1).
The repercussions of COVID-19 on any part of the business ecosystems of your customers could cause them to:
The deterioration in the payment behaviour of your customers can be part of the pandemic's collateral damage, and it could have a crippling ripple effect on your business's cash flow. To minimise such risk, you will need to optimise accounts receivable and limit bad debt losses as much as possible. Below are four accounts receivable collections best practices you can adopt in the time of COVID-19.
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It is important to identify the accounts in your portfolio that may encounter liquidity problems due to COVID-19. By assessing and categorising your accounts, you can focus and tailor your collections strategies to the accounts that need them most.
The accounts receivable portfolio of each company is unique, but you can start with the basic three-tier system below and adapt it along the way.
The pandemic is unlikely to influence their payment behaviour.
The pandemic could adversely influence their payment behaviour during and shortly after the outbreak.
The pandemic threatens their solvency and could cause them to default on payments in the near future.
As long as the renegotiated terms align with your company's credit policy, renegotiating with customers carrying payment risk often gives you more chance of collections. The key is being diplomatic while being insistent on settlement terms.
Sometimes, small discounts are enough to speed up collections in economic hardship.
This could work for customers in temporary financial distress (i.e. "Fair" accounts). An example of short-term relief you can give is suspending interest and late fees.
This could work for customers having cash flow problems or liquidity issues, and therefore, not being able to pay in full (i.e. "Poor" customers). Accepting what can be collected in the short term through payment plans is better than having to write the accounts receivable off in the event that COVID-19 worsens the economic downturn.
Minor hiccups in your accounts receivable process in normal times can become inherent inefficiencies in coronavirus times. Ironing them out would help you save precious time and working capital that your company needs to weather the storm.
Improvements you can make to your accounts receivable collections include:
Accounts receivable turnover ratio, days sales outstanding, and accounts receivable ageing amongst other metrics could be included in a regular report.
These metrics will help you spot potential cash flow problems early, and see if your accounts receivable can meet your company's requirements of working capital and cash during the crisis.
There might be changes in the method your company invoices your customers, the process outstanding invoices are collected, and the way transactions are recorded because of COVID-19. Relevant stakeholders should be informed accordingly so that they can implement the changes consistently.
Besides the initial changes, it is not unusual to make further adjustments on an ad hoc basis during coronavirus times. What is essential is duly recording them in a central repository – any exceptions in your customers' contracts, any changes in their credit profiles, any standard and customised terms applied, and any collections efforts and agreements made.
This helps prevent unauthorised changes and increase the reliability of your customer master data. Proper records of all special arrangements also allow for invoices being sent without errors, collections being executed with the right approach, and disputes being handled in the right manner.
It may be useful to check with your customers to see whether invoicing needs to be adjusted while the pandemic lasts. Invoices could be sent more or less often, they could be delivered by email instead of by post, or they could be adapted to the customers' new payment procedures.
Especially for invoices with large amounts, after they are sent, you could contact your customers to confirm whether they have received the invoices and whether everything is correct. Before the invoices are due, you could also remind your customers about the due dates.
Incorporating necessary modifications and proactive communication into your invoicing system could nip invoicing-related delays in the bud.
Also, you should make the payment process as frictionless as possible. You should take into account that your customers may lack staff dedicated to accounts payable or that their staff may work remotely through the outbreak.
Once your accounts receivable become outstanding you might need to pick up the phone to remind your customers. Calling is often the quickest way to reach customers compared to sending reminders by post or email.
During the calls, you should note down what your customers say and what the next step is. Make sure to send the customers your notes after the calls as well. They will serve as proof if there are disputes in the future and as a point of reference for future calls if there is no progress in payment since your last call.
Depending on each company's circumstances regarding COVID-19, their collections staff may conduct only part of their collections activities or have to suspend them all. If your company finds itself in this situation, to make sure that critical accounts receivable tasks are fulfilled, you may need to establish a strategic partnership with a collections agency where collections efficiency and capacity are assured.
Source: (1) Atradius Economic Research, 'Coronavirus: an unwelcome guest at a bad time', March 2020.
Accounts receivable are often the biggest asset on a company's balance sheet. By optimising collections according to the progress of COVID-19, you help enhance the much needed cash inflows that bring financial flexibility and resilience to your company during downturns.
Our Atradius Collections teams around the world have decades of experience in helping companies successfully manage and collect their accounts receivable.
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