Editor’s Note: This piece is part of our “Executive Input” blog series sponsored by a trusted affiliate member of the National Association of Wholesaler-Distributors (NAW) that extracts key takeaways from short interviews with distribution executives — often answering three straightforward questions about challenges they are trying to solve with technology. These leaders could opt to have their name and company omitted from the blog to speak freely. Keep an eye out for more to come.
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A few business gurus, including Henry Ford, are attributed with every sales team’s favorite mantra, and indeed it’s fun to say no matter who coined it: “Nothing happens till someone sells something.” But it’s the distributor accounts receivable (AR) pros who get the mic drop moment every time they remind the company that “Cash is king.” After all, could anything be more essential at the end of the day?
The vice president of support services at one $8 billion NAW member distributor holds her sales colleagues in highest esteem, but stepping on the gas to bring in the cash is what she’ll always call the big victory of any order. A major part of her department’s speed-to-cash strategy is to further digitize AR with internally-developed tools and predictive analytics.
“Like all wholesaling supply houses, we’re a sales-focused company, and so yes, it’s 100% true that nothing happens without a sale. But one piece of advice that I can give is, don’t overlook your cash conversion points,” she said. “So whether it’s 1) your payment terms with your vendors (your DPO), 2) how fast you’re turning inventory, and then 3) your DSO, how fast you are collecting, make sure you’re looking at those three factors to work your cash conversion. Because I know top line sales are amazing, but your cash conversion is equally important. That’s where the money is.”
It’s not that the organization fights a poor paying track record —quite the opposite, considering an under-45-day average, but they’re nonetheless aggressively on their cash-conversion toes at all times, the VP reports. One thing that helps: Much of the burden of accounts receivables is shouldered by the company’s numerous, locally-operated locations.
“A longer DSO does impact the cash conversion for our companies, the VP said. “One challenge they have is when a project they’re supplying for a customer is going to span over a long period of time, and they have to give them payment terms that exceed net 60 or net 90 — so we educate them on taking advantage of better payment terms on the payables side so they’re maintaining their cash conversion. You want to balance your receivables from customers to the vendors that you’re paying for inventory.”
Homegrown Speed
Already a digitally-advanced AR engine, the receivables/payables department has made significant investments in modernizing its homegrown ERP and digitizing its AP and AR processes and continues to streamline its digital landscape.
“Where I think we want to go next — because we’ve already implemented the automated invoicing, alerts, and self-service customer portals — is to invest more in a data-driven approach,” she said … “So, more predictive analytics that can help us anticipate payment trends and also proactively manage collections. We want to rely less and less on manual follow-ups and manual methods of collection and improving upon our cash collection process.
“We recently implemented a new collections management tool at our company,” she continued, “so now we have the ability to see aging accounts and alerts, send invoices, and make notes within our collections management application. It has really helped our collections process. But where I see this trend going forward is just making small enhancements in our collections tool — you can flag customers that are haven’t paid on time.”
The new tool will allow her team to know when a customer has opened and read an invoice, thus dispelling the “I never got it” response.
“Having those analytics will be the next step and going forward, as the technology gets better, learning our data, learning how we calculate AR status and how our aging works––just having that machine learning to understand our business — that the next two-year plan.”
AI is certainly AR’s secret weapon.
“There’s so much scope in AI,” she continued. “The advancements they’re making every three months is enormous, but you will never take out the human eye in the process. But I think we can automate a lot more such as looking at data on payment terms, or predicting this customer is a riskier account, or seeing a slowing in the payment cycles. Those kinds of data driven decisions are really going to help you make better collection choices.”
Payment Pain
One of the distributor’s key AR pain points has to do with how some customer sectors pay.
“Over the last few years, the trend has been to digitize, said the VP with AR oversight. “You want to reduce the manual touches. You want to reduce services that are of less value-add to your customers. So, on the AR side, one of our challenges is the level of sophistication of customers in terms of paying online or managing their invoices online. We are making strides, but I won’t say that we are where I think we can be.”
“A lot of it is customer resistance,” she added. “In our industry, it’s not uncommon for people to still pay by checks, not ACH — it’s just taking longer but it will get there.”
She continued, “A major issue we face is just managing the diversity of payment structures across all of our companies. You have ACH, you have checks, you have some direct debits — which would be great if everybody did that — and then you have the credit cards and the associated fees, which is huge. It’s a balancing act — we have to keep the customer happy, so you have to be open to all forms of payment.”
More in Our Executive Input Series
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