Episode 1: Impact of Poor Collections-Strategy on CX

Madhurima Gupta:
Hi, welcome to the Mid-Market CFO Circle podcast powered by RadiusOne. I’m your host Madhurima Gupta, I’m the Senior Product Marketing Manager at HighRadius. We hear you mid-market CFOs, and we understand your challenges. On this podcast, we bring you conversation with the CFO community to help you solve problems that you face at CFO’s office every day. Today, we have with us, Lawrence Chester. Lawrence has, uh, spent 25 years as a CFO for companies such as, uh, Colovos, and High Sierra Sport, where he drove finance function to reduce losses, improve financial operation and reporting. Larry founded CFO Simplified 15 years ago, and he has been working with his team assisting mid-market CEOs on business turnarounds, mergers, and acquisitions, and financial and operations management. Hi, Larry, thanks for joining us today.
Lawrence Chester:
Good morning, Maddie. It’s great to be with you.
Madhurima Gupta:
So, uh, Larry, today, we wanted to talk about, uh, how collection strategy not being properly set up, can disrupt the customer experience that brands offer their buyers. So we wanted to discuss a little more about it, understand what your opinions are. Uh, so to kick it off, I wanted to understand that in your experience, uh, what have you seen, um, in terms of mid-market companies, uh, reaching out, uh, and following up on their past-due invoices and when do they actually begin planning collections?
Lawrence Chester:
Well, it’s interesting that you asked that question because I think most business owners, especially in the lower middle market are very concerned about what’s happening today and tomorrow. And don’t really look strategically at what they need to do down the road. So just as they come in and they deal with the operational problems that they’re facing on a day-to-day basis, they very much deal with the financial issues for their company on a day-to-day basis as well. So I don’t think they spend as much time managing their accounts receivable as they do worrying about their cash flow and ending up in a position where, oh my gosh, they don’t have enough money to cover payroll this Friday or to cover all the payables that they wanted to cover, or to be able to take care of new inventory they want to bring in. And they take a look at their accounts receivable and suddenly they realize that their accounts receivable is aging out over 30 days past invoice date or 40, 45, or even 60 days late. And that’s the time that they get on the phone or have people get on the phone and start to call to do collections. Um, it’s really trying to close the barn door after the horse is already gone. They’ve already missed the window of opportunity to collect that money on a timely basis. And now what they’re doing is chasing it.
Madhurima Gupta:
So Larry, do you think that because there is a delay, right, there are other important processes that are prioritized over going ahead and looking at aging buckets on a daily basis that there is this lag. So what would you recommend, uh, CFOs and their teams to do on a regular basis so that this slack is not there and they look at their worklists or collection prioritization lists on a regular basis?
Lawrence Chester:
Well, I think it’s a matter of making sure the collections are really part of the regular job responsibilities of somebody on their team, just as the CEO, isn’t going to be concerned on a day-to-day basis or actively go to the dock to make sure that that shipment went out. I don’t think they can actively look at the accounts receivable on a day-to-day basis to make sure that those things are being done. A good CEO should be operating on a proactive strategic basis. So collections of accounts receivable are very much regular day-to-day operational work that, uh, the accounting and finance department should be doing on a regular basis. And I think the priorities really fall into a couple of different areas. One is making sure that individual clients, individual customers who are problems for collections, uh, the, that isn’t something that happens overnight. These are companies that have always been a problem for the individual, uh, business, business owner. And so those need special attention on an ongoing basis. And the other thing is to have somebody on your staff who regularly is monitoring accounts receivable, so that when there are large invoices that are coming up, they can proactively contact the customer and say, is this in your system? Are we going to get paid on time? Um, or be in a position where there’s a regular notice given if somebody doesn’t pay according to the schedule that they’ve normally been paying.
Madhurima Gupta:
So, um, you know, given that many companies do not have a tailored collection strategy, uh, which takes into consideration customers’ past payment behavior, right? So would you agree if I say that in general, CFO offices use a blanket approach to, uh, collections across all types of customers?
Lawrence Chester:
Oh, I think that’s very true just as, uh, companies put together credit policies that are blankets of what they would like to see across the board rather than really tailoring a credit policy to the, uh, individual customers and the experience that they have when they do credit checks on, uh, on clients, when they first bring them on board. It’s the same thing they’re going to do with regard to credit policy, uh, from a collections perspective. They’re going to assume that everybody’s paying on a net 30 basis. If they’re giving them net 30 terms, they’re going to assume that everybody’s gonna pay on a net 30 basis. And so they don’t even pay any attention to it until they’re 15 to 30 days late. And the assumption is that everybody is going to pay on time. Everybody is gonna be honest and straightforward in dealing with those things and take care of the responsibilities that the individual business has. And I think in a normal economic environment where companies have plenty of cash in a rising economy, I think understanding or assuming that people are gonna pay their bills is, uh, pretty much commonplace, and I think you can plan on businesses paying on time. In the current economic environment, where there are a lot of companies that are really stretched to the, uh, stretched to the walls in terms of how much cash they have available, I think they’re gonna be very picky about the bills that they pay and, uh, that credit policy from the customer’s point of view of how fast they’re going to pay and how frequently they’re going to pay is gonna change on a day to day basis based on their individual cash flow.
Madhurima Gupta:
So, Larry, what would be your opinion in terms of automating this process, depending on how, uh, different buckets of customers have been performing, right. So there is a possibility that you can automate a part of it wherein, let’s say, depending on the aging buckets, you have certain automated correspondence, cadences, right? So that is one way. Now um, how do we ensure that while we are picking automation, we don’t compromise customer experience?
Lawrence Chester:
Well, I think that’s an interesting problem. One of the things you’re facing is that dealing with situations on a blanket process are always difficult. Uh, any setup that you do on any ERP system or any, uh, ancillary software has to be customized and dealt with on an individual basis. It’s fix it once, and then you don’t need to worry about it going forward. Um, and I think if you’re using an automated solution, being in a position where you use that same blanket answer for every client is going to create the same problem as you had when you’re doing it on a manual basis. I think the issue is gathering data and then acting on that data so that it, uh, accurately reflects what’s happening in the marketplace or in your marketplace for your individual clients. So making sure that you understand what the payment history is for each individual customer, so that you can then tailor your follow-up, uh, for those individual customers based on what your experience has been with them. You know, I, I know from my experience that there are clients that pay on a regular basis, uh, even if they have bad credit, uh, because you are the one company that they’re keeping cleans, that they can use you as a credit reference. Well, the same thing’s true across the board. You are going to have a different experience with every single client that may be different than the experience that other people have with them. And so you really need to judge how you are relating to that customer based on your individual experience with them.
Madhurima Gupta:
That’s a very interesting point. So with cases like these, where the creditworthiness of a client is not directly implied by their credit behavior, right, payment behavior. For cases like that, how would you recommend a CFO office to offer, um, you know, or to streamline their collections?
Lawrence Chester:
Well, I think one of the things that you need to do is constantly be aware of the marketplace in the situation where we’re talking about accounts receivable. It’s a very real situation that you’ve gotta watch on a day-to-day basis, really on a month-to-month basis, how your individual customers are paying you. You can’t make any assumptions going forward. The economic environment is changing too rapidly to just assume that what happened six months ago is what’s going to happen for the next six months. And I think companies need to be more aware, of what their accounts receivable is, how it’s being managed, how their staff is managing it, and what the reaction is from the customer’s point of view to whatever outreach you do to them to get payments.
Madhurima Gupta:
But would you say that there’ll be always certain outliers wherein uh, even past behavior, their credit history will eventually not add up and there might be cases when the customers you knew would pay, would not end paying you and your collections would be, you know, sent backward. So is that something that you’ve seen, uh, companies experience in mid-market?
Lawrence Chester:
Oh, I don’t think there’s any question about that. I think the last two years with the economic strain that’s been on every business has certainly created exactly the situation you’re talking about that companies that used to be solid paying customers suddenly are not. Um, and, and I think that’s one of the things that I’ve talked to many of my clients about in terms of revisiting credit policy on an ongoing basis. It’s not just a matter of the fact that somebody has always been a good customer and is always paid on time. And so you’re expecting that they always will. Just as your company’s financial situation is dependent on how your customers treat you, your customers are facing exactly the same thing, uh, from their perspective and their customers, um, pay, uh, if their customers pay them late, then they’re forced to be in a position where they have to judge who they’re going to pay. There’s a real domino effect that goes on. And the company that sits blindly waiting for that money to come in is going to suffer in the end result because when a company is late paying and therefore doesn’t eh because they don’t have the cash to pay you if you wait another six weeks to call them to find out where the money is, they’re gonna be in an even worse position to pay you than they were six weeks earlier. So the situation is that you need to be really on top of it, uh, on top of collections to make sure that you can respond immediately when somebody is operating outside of what you have normally had as a norm for them. If a company is paying normally every 30 days on the clock, no matter what, and suddenly you get a payment from them, that’s seven days later than normal. I think it’s time to give that account additional scrutiny.
Madhurima Gupta:
And it also kind of, uh, you know, brings in the point that human biases need to be overcome because with human biases based on past, uh, um, you know, customer payment behavior often, you know, humans tend to feel that, alright, it might just be a one case, a one-off cases where, uh, you know, a customer ended up paying less or later than when they were supposed to. Uh, so would you say that this is where mid-market companies should also start thinking about automation?
Lawrence Chester:
Well, I think the situation is that if you have, uh, you know, five customers, it’s very easy to manage them. If you’ve got 500 customers, it’s much harder to manage them on an individual, uh, basis. So I think certainly if there was an automation tool that allowed you to set rules and policies and practices and have the, uh, software identify when things are happening out of the norm so that you can react to it. I think that’s key. Uh, and I think that’s the key for any financial, uh, operating system or any way of managing a business. Uh, the most efficient way of doing it is management by exception. You, you don’t need to look at the things that are working properly on a day-to-day basis. [laugh], I mean, why spend your time worrying about an order or for an individual customer that’s always been operating according to the norm, what you wanna do is pay attention to the things that are operating outside the norm.
Uh, and whether that be in manufacturing or in inventory control, or dealing with sales or dealing with customer collections, if it’s operating outside the norm, then it needs to be addressed. And so the question is, how do you determine whether it’s outside the norm and how quickly do you respond to it? And that’s very difficult to do on a manual basis in any operation. And that’s why companies put together dashboards to be able to do that. And I would certainly think that piece of software that managed accounts receivable and created a dashboard like that would certainly be an advantage for any business that was using it.
Madhurima Gupta:
Absolutely. So, Larry, I’m sure you’ll be listening to a lot of CEOs and even CFOs and where they’d be discussing, um, you know, the steps that they take into consideration when they’re choosing an automation vendor or an automation solution, um, wherein you know, they can make sure that they’re able to improve their processes, whether it is accounts receivable or any other process at CFO office. Right. So what would be your recipe to identifying an automation vendor, and solution that you’ve seen work in mid-market CFO offices?
Lawrence Chester:
Well, I think the key obviously is a cost-effective solution. Um, being in a position where every company is being careful about where they’re spending the money, the question is, is the solution that you’re putting in providing you with a cost-effective solution to a problem that you have, or a problem that you anticipate you might have. Um, being in a position where you are concerned about collections. And especially if you’re concerned about how an economic environment is going to impact on your clientele and their ability to pay, I think being in a position where you can find a software product or find any tool that you can use, that’s going to help you manage and monitor, uh, something as important as collections because collections feed cash flow. And if you don’t have cash flow, you can’t operate your business. So I think a tool like that would certainly be important as a means of helping businesses manage cash flow.
Madhurima Gupta:
Interesting. That’s very helpful. I’m sure our listeners will benefit a great deal from it. So, uh, we are at top of, uh, the time, uh, Larry. I wanted to, you know, get your parting thoughts on what would you say are the most important aspects of ensuring that a collection strategy set by a mid-market CFO office does, is not going to compromise customer experience?
Lawrence Chester:
Well, I think there’s a couple of things. One is it needs to be watched. This needs to be something that’s highlighted by the CFO and the CEO of a company and that’s collections. And the second thing is being, uh, consistent in terms of how you manage it with your customers. Uh, customers are very concerned about things that are different. You know, remember I said a little earlier about managing by exception. Well, if you’re working with the supplier who is always looking at your making payments within seven days of a due date, and as long as you make a payment within seven days of a due date, they’re not gonna be bothering you. Your reaction is going to be always make sure that you operate that way. If, if you are in a situation where you operate on a, a panic basis where you don’t call anybody, and then all of a sudden you call everybody, and then a month later, you don’t call anybody again.
And, and you’re just jumping around with how you’re processing and managing things. I think that makes it difficult for your customers to understand how to work with you. And I think being in a position where everybody meets expectations, you as a business owner, uh, or as a CFO, understand how your customers are gonna react to paying their bills and your customers understand what your threshold is for under, for, uh, reacting to them being late. I think that relationship becomes more solid as it becomes more consistent. And so that consistent relationship I think is important in success.
Madhurima Gupta:
Perfect. So that was the recipe from Larry on how to ensure success along with ensuring a great customer experience. Uh, thanks for joining us again uh, Larry, it was enlightening. And for our listeners out there, keep listening to CFO Circle. We’ll be back with more.