The economic downturn caused by the Covid 19 virus will force most companies to sell on credit to financially weak customers in order to survive. This is a huge, unwelcome, risky change. How can a company do this and survive?
Financial strength and cash reserves vary widely among companies. How long can your company survive with drastically reduced revenue and cash inflow? The answer depends on two key influences:
Generating revenue will be a challenge, with customers demanding that you sell on credit. Generating cash from those sales will be the extremely difficult task.
Success in generating cash will be driven by the following actions/programs:
Shift Credit Department efforts heavily to customer monitoring and dialogue.
To avoid a catastrophic revenue decrease, you will have to sell to financially weak customers whose credit rating may be far below your current acceptable risk standards. Inevitably, you will suffer larger bad debt losses than in the past.
Covid-19 Credit Risk Control is an approach to minimize bad debt losses while maximizing revenue and cash collection from a financially weak customer base, during the next twelve months while the economy suffers a severe downturn.
Coping with this change will require a unified posture to the market that defines how accommodating your company will be in meeting customer demands for higher credit. Meanwhile, Accounts Receivable delinquency and risk will grow. This posture can only be formulated by Senior Management which must communicate it to all staff and to customers (especially the larger ones). The key factor is to target how to achieve a sales level that enables the firm to break even – then shape the risk tolerance guidelines to enable that level of sales.
This economy will also require a major shift in work within the Credit Department to much more credit assessment and collection work with greatly increased customer contact.
John Salek is President of Revenue Management Associates, an Accounts Receivable & Order to Cash consulting company. He is a highly experienced financial professional with proven performance in the Order to Cash process including order and contract processing, billing, dispute management, credit control, collections and cash application. John has worked in a broad range of industries with over 250 clients.
John’s consulting experience includes a variety of engagements that have generated over $800 million of increased cash flow, improved productivity, and enhanced customer service for over 250 companies. Improvements in process, metrics, staff skills, and technology tools have been implemented to drive measurable improvements in cash flow, cost, bad debt exposure, and customer satisfaction.
John has led numerous High Impact Receivables Recovery projects that have enabled clients to recover from deterioration in their receivables asset. Such deteriorations are often caused by integration of acquisitions, implementation of new ERP applications, and migration to Shared Service Centers. These “one-time” Recovery projects have delivered substantial benefits in cash flow, cost, bad debt exposure, and customer satisfaction.