Episode 14: Credit Control And Risk Mitigation At CFOs Office

Madhurima Gupta:
Welcome to the Mid-Market CFO Circle podcast powered by RadiusOne. I’m your host, Madhurima Gupta. We hear you mid-market CFOs, and we’ve got your back. Every Thursday, we bring you the CFO Circle podcast with your peers and we discuss the challenges you face and how you can leverage emerging technology to solve it. For that purpose, today we are gonna talk about why CFOs must prepare for both short-term and long-term uncertainty to fully understand and mitigate credit risk for their organizations. I have Terrell Turner joining me today for the podcast, uh, to understand the need to improve credit policy and manage growth in businesses through these economic times. So welcome to the show Terrell, how are you doing?
Terrell Turner:
Great. Thank you for having me.
Madhurima Gupta:
 It’s a pleasure to have you here, and I’m so thankful to you that you were able to make time. So before we get started Terrell, I have a few lines written out about you that I’d like to use to introduce you to our listeners. Well, Terrell here helps businesses in the food and beverage industry to simplify accounting and finance so that the numbers actually help these businesses run a more effective and profitable business. He is a New York times featured CFO and is 40 under 40 CPA. Prior to starting his fractional CFO services company in 2012, he worked as director of FP&A at Passport and also held Senior Manager positions in FP&A  and operations at GE Aviation before that. Before I get started with the discussion on how CFOs can steer their offices through the economic climate change, I really wanted to understand what motivated you to decide to start fractional CFO services at a TL Turner group?
Terrell Turner:
Yeah, so I spent a lot of time working with probably some of the biggest companies in the world, um, in industrial manufacturing and, work for one of the big four public accounting firms. And what I realize is they had a lot of resources, a lot of knowledge, and wisdom that they were using to navigate some of the challenges in their business. But then when you thought about small to medium size businesses like they really didn’t have access to the same level of insight. And so I was like, you know what, let me take my experience of the things that I’ve done in with bigger companies. And then my last role as an FP&A leader was with a medium-sized company. And let me take all those skills and start helping other medium to small businesses that help them grow and scale even more. And that was really what drove me to really start the firm.
Madhurima Gupta:
That’s super. That’s a very right motivation and it’s in line with what we hear here at HighRadius. So, you know, there are a lot of times that companies come in looking for a solution that is easy to implement, takes less time to implement, and is able to solve their exact problems. Right? So at that point, having this knowledge or this intelligence that we try and feed into our solutions at HighRadius as well, right? Because we have a lot of data points that we use and that is in turn used to help companies run their processes better. I think what you’re doing is terrific and I’m sure there are a lot of people that are benefiting quite a lot from it. So to get started with the interview in terms of, you know, this podcast about understanding how CFOs can, you know, steer through the economic climate change. The first question that I have for you is, um, do you believe that it is critical for CFOs to change their credit policies in light of the current economic uncertainty?
Terrell Turner:
Absolutely. I mean, I definitely think that CFOs should be even aware of what are their current credit policies. And then what does their business need and then start looking at, Hey, how do we change some of those policies to accommodate the current needs of the business?
Madhurima Gupta:
And what are some significant red flags that mid-market CFOs should be looking at while they’re monitoring their customer’s credit risk?
Terrell Turner:
I think one of the first ones is I think this is more of an internal process as a start is, do they even have accounts receivable or a credit review process? Because I think sometimes businesses are so eager to close a deal or to get more sales that they don’t even have a process to review to the right people. And then once you start to actually have a process to review it, I think of really asking yourself, you know, how frequently is this person paying? Like when we follow up with them, how do they respond? Do they say anything back, or do they give us any kind of updates or any kind of estimates, or do we send them email after email and they never respond? Like, to me, that’s a red flag. If you don’t have an open line of communication with your clients because you’re never gonna be able to get on top of your credit issues if you don’t have an open line of communication with them.
 
Madhurima Gupta:
What else? Are there some other red flags that you can think of?
Terrell Turner:
Depending on the size of the business is you start to look at the, I guess, the trends of your customer’s orders. If your customer’s activity is going through massive fluctuations, that may be a sign that their cash flow isn’t as stable. So you wanna make sure that you are on top of that, that you’re having some of those conversations with them. And maybe that means you need to change your credit terms because they could be at risk of not being able to pay your bill when the invoice comes due. And maybe that means looking at some options of asking for certain, a higher percentage upfront, or maybe that means changing the terms and the due dates. And I do think some of that becomes a factor of, you know, the finance team working with the sales team and really talking through that and discussing some of those changes. And I also think that from a finance team is really a red flag. Maybe some of the things that the sales team is hearing from the client, whether it is, Hey, the client is talking about some challenges that they’re having in their business, you know, challenges in one business could mean, Hey, those challenges are just gonna cascade and impact the supply chain and also negatively impact your business. So you wanna make sure that you’re listening or are there any disruptions that are happening in your customer’s business? Because if they’re going through significant disruptions, chances are their cash flow is gonna go through disruptions, which could impact your cash flow. And then I think you have some of the obvious things of when you, you know, you look at some of the credit ratings of some of your customers. I mean, obviously, if they have a bad credit rating, you know, it may not immediately mean, Hey, don’t do business with them at all, but it may very well warrant an honest conversation with that client, and then maybe, Hey, that client needs to have different credit terms than some of your other clients who have more stability.
Madhurima Gupta:
Since you mentioned, uh, credit rating and managing limits better in this shifting economy, do you think that manually managing credit ratings and limits is a reliable approach?
Terrell Turner:
Absolutely not. I mean, you know, if you’re a small business and you have four customers, maybe you can do it, but if you’re really a mid-market company, you have way too many customers to manage it manually. Plus they, you know, it is gonna cost you a lot of money to hire a bunch of people to manage it, you know, manually. And right now, there are some cost-effective services and tools out there that can help, you know, develop, you know, you can program in some critical KPIs or some trigger points, and the software gives you the data that you need. So you don’t have to monitor it manually.
Madhurima Gupta:
For a number of clients that you’ve been managing. Have you seen some of your customers leverage the right tools that were, you know, able to help them ensure accuracy and timeliness of, you know, managing credit data for their customers?
Terrell Turner:
You know, unfortunately, I mean, it is been, uh, I’ve kind of been brought in on the end of where they’re starting to navigate you their hyper-growth stage. So for many of them, they were just so focused on growth that they didn’t think about that to where I have to bring it up to them, to where they weren’t already using a tool. They really didn’t have a process in place. And then I’m having to introduce them to, Hey, here are some of the red flags we should be looking for, Hey, here’s why this is a problem. Hey, we should probably have for the next customer you bring on, Hey, here’s some of the processes. So I’m usually working a little bit on the front end of trying to help explain why this is an issue and help them kind of recover from the issue. So I haven’t seen a ton of companies and some of my clients that already had a system or a tool in place that they’re using.
Madhurima Gupta:
And, uh, you know, as advice to these companies, what is your pitch when you tell them that, Hey, you should be leveraging the right tools for managing your customer’s credit data better?
Terrell Turner:
Yeah, I think the first one is really just looking to say I care.  If we look at their cash flow statement for their business and we see that they are, they’re having to take out, you know, short term loans or they’re having to make some, you know, some decisions on not investing in growth, because they just don’t have the cash there to make that investment. Then I look and say, okay, all right. If we had a, you know, a process, and if we had an automated process for collecting your receivables, we wouldn’t be having this debate. Like you would be able to invest in the growth. So we are missing out on a growth opportunity because we don’t have a process in place. And then I also think for, you know, for other situations, just asking the, you know, the finance leaders or asking just the sales team is how much time are you spending, having to go back and follow up with people about, you know, their credit and them paying their bills? What if we had a more, you know, a better process, a more automated way of this flowing to where you didn’t have to spend as much time trying to chase these people down to get this, like how much more time would you have to then go talk to new customers and to grow the business, you could probably hit your sales targets and the business could probably grow. So we really look at it from an opportunity cost of what investment opportunities are you not able to make because you’re missing out on this. And then also what sales opportunities are you missing because you’re having to spend time chasing behind people because you have a manual process,
Madhurima Gupta:
Terrell going back to a statement that said at the beginning of this episode, you know, you mentioned that a lot of companies, they focus on the growth, uh, which is why they kind of miss out managing their credit risk in the very beginning until they get into the hyper-growth stage. Right. So what would you suggest or what would you advise CFOs or CEOs to be able to strike the right balance in handling credit risk and growth in their business?
Terrell Turner:
The most obvious thing from a finance standpoint is knowing that in order for you to grow, you are gonna need cash flow to invest in that growth. Because if you don’t have enough cash, then your growth is going to significantly slow down. Or unfortunately, in some cases, your growth is gonna stop altogether. So as a CFO, you wanna make sure you have that balance based on how we’re trying to grow is, do we have enough cash to support that level of growth? So I do think for the finance leaders in any organization you need to be looking at your cash flow projections and asking yourself if we, you know, grow. And we bring on this many customers, if we expand our internal team by this many employees, what does this do to our cash flow and really looking at that and saying, will our cash flow take a big dip?And in most cases, if you’re investing in growth, you are gonna take a big dip in cash. And the only way that you really recover from that is, or let me say the only sustainable way that you recover from that is having good credit policies and collection procedures in place. So that as you’re growing, you’re making sure that you’re collecting from your customers. And I think that during your growth stage, you really wanna monitor that because it’s very tempting to just take any and every customer that comes your way, but that’s where you really have to make some hard decisions and you really have to balance things to say, Hey, of all the new customers that we brought on in the last three months, what have their payment terms look like? Like, have they really been actually paying their invoices? And if you start to notice a trend, then you have to have a conversation with the sales team. Like, Hey, we need to either tweak the process or we need to change our credit policies for these types of customers because we’re noticing they’re not paying their bill, which means we’re not able to hire the talent we need, or we’re not able to spend more in marketing and promotions to keep the sales team with a healthy pipeline. So I think, it is all connected and CFOs have to be a lot more proactive about being able to get that data to the rest of the team and helping them understand how connected this is is that if we do not have good credit management policies, eventually our growth is going to slow down. And whether we like it or not, our growth is just, we’re not gonna have the resources to invest in it.
Madhurima Gupta:
The other question that I have for you Terrell is on lines of, uh, outsourcing processes. So, you know, given the economic uncertainty the post-2020, you know, is outsourcing critical work such as managing accounts receivable, a reliable process for midmarket CFOs?
Terrell Turner:
I definitely think it is a very, very viable, you know, process to outsource. And one of the rules of thumb that I go by when it comes down to outsourcing processes, is this something that has a very clear process, and is that process repeatable? And when it comes down to accounts receivable, credit management, credit reviews, like those are very, very clear processes that can be created around those things. And if you can create a clear process, you can probably educate a outsource team, who’s probably gonna be less expensive than your internal team to really focus and make sure that they stay on top of that process. So then you can use your internal team to do more of the things that require judgment and a deeper knowledge of the business. Because if you can, you know, really strike that great comparison, I think you’ll have a great opportunity to really do what’s best for the business.
Madhurima Gupta:
But do you think that outsourcing, let’s say an accounts receivable process, which can be set in rules and, you know, can be dealt with is something that will be a long term solution for CFO offices, especially when you scale because you, you may or may not be able to control the quality after the point?
Terrell Turner:
Yeah. I mean, I do think that it can be a great, I guess you would say transition process of being able, uh, because if you’re in hyper-growth, you probably don’t have the time to manage it internally. So if you’re in hypergrowth, I do think that you can use outsourcing. And one of the things that, you know, that I’ve advised some clients to do is, Hey, right now we’re in hyper-growth for all the internal employees. You need all hands on deck focused on being proactive and really helping the operating and the sales team navigate this growth. For now, let’s outsource this and when you outsource it, let’s make sure the team that we outsource it to is laying out the process and they’re perfecting the process of this. And then once we get to a more, you know, a more stable time, we can then look, take that process that they’ve created. And we could possibly look at some automated tools because the thing that you have to have before you really, you know, go with an automated tool is you have to have a clear process. And so sometimes using that outsourcing temporarily could allow you the time to get that process down and get that process clarified. So when you wanna go with an automated tool and bring it back internally, you have clear processes around it.
Madhurima Gupta:
Of course, there will be challenges when it comes to outsourcing and you did touch up on a few of them. What would you suggest, or what would you advise as the benefits of, you know, relying on automation versus let’s say hiring and building a new team first from scratch to, you know, get these solutions in-house or, you know, whatever process you have outsourced, if you wanna bring it inhouse, what would you say would be the right balance?
Terrell Turner:
Yeah. I mean, I definitely think that when it comes down to, you know, any process that you have, you know, or let me say any step that you have developed clear processes around, and you’ve actually tested your processes like you’ve looked at it from different scenarios. Well, what if this factor changes, does the process still hold? And I think that’s where using outsourced talent is you can test your processes like, Hey, based on the process we designed was the outsourcing team able to handle it. And I think once you get clarity that, Hey, we have a really good process that is flexible enough to accommodate, you know, the typical or the expected type of scenarios. And that can also handle some one-off scenarios. I think then you kind of have a little bit more confidence that, Hey, now that we know the process, now we can actually work with someone or some company or some software to actually automate this because we know the different factors that need to be programmed into the automation. And so I think by using an outsource team to test the reliability and test the durability of your process, then I think you can probably look at some automation. Because one of the things that I have seen from, you know, some, some large companies that I’ve worked with where they tried to go directly into automation before they had a reliable and a consistent process. And what they found is every time a factor changed, they were trying to reprogram the automation tools. And that just defeats the purpose of having automation is if you have to reprogram it every two months, I mean, the benefit you get from automation is that as you start to add new clients, you don’t have to reprogram it. You can scale a lot faster, but I think that first starts with really making sure that you have a reliable process and then working with a reliable tool that can accommodate that process. So you can scale and really bypass. Like I said, some of those headaches you would have is if you had to hire a new team, every time you got to a critical mass and you had to go through and train that person. But if you are using an automated tool, typically an automated tool can adjust with the push of a couple buttons.
Madhurima Gupta:
Absolutely. I totally agree with it. And that’s exactly what we are trying to do here at HighRadius as well. Wherein, what we do is we are training our machines on, you know, the different occurrences that happen across industries. And then we are using this data to help, you know, companies in the same industry benefit from it. So that way, uh, you know, processes that have worked out in one industry, we have the knowledge or the, uh, you know, artificial intelligence built based on that. And that is what we are leveraging to help people implement solutions quicker because we know what are the gaps and what can you fill and how should you fill it? Right. So, you know, that’s something that we are also absolutely, you know, in line with what you just said. Perfect. So I think those were particularly my questions, uh, before we sign off, I wanted to understand from you, um, that, you know, if you had to give your parting thoughts to a CFO who’s choosing to outsource versus automate versus hire and build a team to set up their accounts receivable process, then how would you suggest them to strike the right balance to ensure that they’re able to cater to hyper-growth?
Terrell Turner:
Absolutely. One of the things that I would say is during the phase of hypergrowth, there are gonna be so many things that are changing and the goal is not so much just to focus on, Hey, how do we get the work done? But I think it’s really, how do we create the systems and the processes that will then those systems and processes will get the work done. So even for myself, as I’m using outsourcing talent and different functions within my own business, my goal isn’t, Hey, let me give it to them and they’ll have it forever. It’s Hey, let me give it to them, leverage them to help create a good process. And then how do we find an automated tool to do what they’re doing? Because then it frees their time up for me to give them the next thing that needs to be, you know, systematized. And once that does have a good system, then it can go into an automation tool. And it just becomes this ongoing cycle of, Hey, leveraging the outsourcing or leveraging my internal team of how do we build a system around it, and then pass that system onto an automated tool. Because as you’re navigating growth, there are gonna be so many things that keep changing. But if your outsourcing team is solely dedicated to doing this one process, the next change that your business goes through, you’re gonna have to try to train a new outsourcing team, or you’re gonna have to go find an additional outsourcing team. And eventually, it’s not gonna make financial sense for your business. So I would say, look at it like a cycle of you’re on the front end, you’re dealing with a lot of the subjectivity, you get it to a clean enough process to hand it off to an outsourcing team. They can help perfect the system. And then you hand that to an automation tool. And then that way you have freed up their time to hand them the next project. And you just continue to keep that cycle going, which allows you to scale at a faster pace and a more efficient pace than you could imagine.
 
Madhurima Gupta:
What you mean here is that an outsourcing team can be used as a consulting team that is actually perfecting the process for you to identify the gaps that you’re able to fill in. And then you can just use an automation tool once you’re aware of all the scenarios. Is that right? Perfect. I think those were my questions today, Terrell. I think this was a very interesting session and I’m sure people are gonna learn a bunch from it. And I thank you for your time for the same, and I hope to have you soon on the CFO circle again. And in the meantime, everybody listening in, please stay tuned. We’ll be back with more.