For executives in emerging markets, currency volatility stemming from the eurozone crisis and other uncertainties has added an extra layer of complexity and urgency to the management of working capital. Reducing Days Sales Outstanding (DSO) is critical for preserving margins if local currency–denominated receivables depreciate against the dollar. Furthermore, reduced access to capital continues to be a major pain point for smaller, local partners in emerging markets. Helping these local partners navigate the credit crunch by giving them the tools to more effectively manage their working capital can be critical for ensuring their survival, maintaining the continuity of supply chains and distribution networks, and fostering long-term goodwill.
Executives need to consider two dimensions when evaluating the best strategies for mitigating these challenges: Internal (their own business operations), and External (their distributors and other channel partners). Let’s focus on the Internal dimension first:
Internal Focus: Three Strategies for Improving Collections Efficiency
1. Prioritize receivables based on risk and value rather than age
Traditionally, treasury teams have aligned resources by prioritizing the oldest outstanding receivables for collection. An FSG client in the agricultural chemicals industry has given its treasury team a more strategic mandate to look beyond age to consider risk and value as the key metrics guiding collections activities. This ensures that extra steps can be taken at an early stage to collect from the accounts that are most likely to lapse beyond 30 or 60 days outstanding, which minimizes foreign exchange exposure, lowers default risk, and ultimately reduces DSO.
2. Avoid a “one size fits all” approach to collections
Many companies have invested extensively in automating receivables collections, but one FSG client in the software space has emphasized the importance of the general manager working with the treasury team to ensure that collections strategies are adapted for specific customer segments. Recognizing that a small, privately owned local company with 30 employees requires a different collections strategy than a government client will not only improve the efficiency of collections and reduce DSO but will also help to foster goodwill and increase the long-term value of the relationship.
3. Separate disputes from normal collections processes
For many companies, the inability to segregate disputed receivables from a particular invoice can seriously impact cash flows and negatively impact DSO. An FSG client in the consumer electronics industry invested in a receivables management software package that allows it to disaggregate these disputes from invoices. Now, rather than placing an invoice’s entire value in dispute due to a disagreement with the customer regarding one line item, the company can move forward with collection of the agreed-upon balance and handle the remainder through the normal dispute process. This simple shift has allowed the company to reduce past due accounts receivable by 20%.
In my next post, we will take a look at the External dimension, with three strategies focused on third-party distributors and channel partners.
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