How Accounts Receivable Can Transform your Business

ANNOUNCER: Welcome to the Cherry Bekaert Industrial and Consumer Goods Podcast Series. We aim to explore this dynamic world, discuss the operating challenges facing manufacturers, and offer new ideas and solutions. Join us as we uncover growth strategies and enhance after-tax cash flow in the ever-evolving industrial and consumer goods landscape.


COREY YORK: Good day, everyone, and welcome back to our Industrial Manufacturing and Consumer Goods Podcast Series. I'm Corey York, a finance strategy and operations consultant at Cherry Bekaert, noted carbohydrate connoisseur and working capital enthusiast, and I'll be your host today.

COREY YORK: Joining me is my colleague, Mike Piotrowski, a finance transformation leader who has spent the last two decades helping CFOs and private equity owners unlock their working capital and modernize their finance function.

COREY YORK: Mike's work spans from startups all the way up to Fortune 50 companies, where he's consistently helped clients unlock trapped cash, shorten cash cycles, and build stronger working capital management across finance and operations.

COREY YORK: You may have listened to our previous installments regarding working capital in general and in the context of inventory. Today, we'll continue working our way around the balance sheet by diving deep into one of the most impactful areas for freeing up cash: accounts receivable optimization.

COREY YORK: AR is more than just collecting payments. It's a direct reflection of your company's health. When it's managed well, it can dramatically improve cash flow, reduce bad debt, and strengthen relationships with your customers. But when it's not, it can be a major drain on resources and a source of constant frustration.

COREY YORK: We're going to break down why it matters, how to spot the red flags, and what you can do about it.

COREY YORK: Mike, thanks for joining me again. For those who might not see AR as a strategic tool yet, why is it such a critical part of a company's working capital?


MIKE PIOTROWSKI: Thanks for having me, Corey.

MIKE PIOTROWSKI: In our last episode, we talked about inventory as the lifeblood of a company. If that's true, then accounts receivable is the heartbeat. It's the rhythm of cash coming into the business.

MIKE PIOTROWSKI: While inventory is often the largest current asset for many companies, accounts receivable is a close second. It's the money that's rightfully owed to you for goods or services already delivered.

MIKE PIOTROWSKI: Think about it this way. Your company has already spent the time, money, and resources to produce and sell a product or deliver a service. If you don't collect that cash in a timely manner, you're essentially financing your customers' operations instead of your own.

MIKE PIOTROWSKI: This ties up your working capital and limits your ability to invest in growth, pay your bills, and manage day-to-day operations.

MIKE PIOTROWSKI: Therefore, when you optimize AR, you're not just chasing payments. You're accelerating your cash conversion cycle and putting that money to work for your business much faster.


COREY YORK: How can a given company tell if it has an AR optimization opportunity? What key indicators do you look for?


MIKE PIOTROWSKI: That's a good question, Corey, because the red flags often show up in both the numbers and day-to-day operations.

MIKE PIOTROWSKI: On the financial side, the most obvious indicator is high days sales outstanding, or DSO. This metric tells us, on average, how many days it takes for a company to collect payments after a sale.

MIKE PIOTROWSKI: If a company's DSO is consistently higher than its industry peers or its internal targets, you have a problem.

MIKE PIOTROWSKI: Beyond the numbers, you're going to see operational warning signs like a growing pile of invoices that are more than 60 or 90 days past due, an increasing amount of bad debt write-offs, and constant back-and-forth communication with customers about billing errors or discrepancies.

MIKE PIOTROWSKI: You may also see your collection team spending more time on administrative tasks than on actually collecting money.

MIKE PIOTROWSKI: Finally, you may see a lack of clear and consistent collection policies. When different people are doing things different ways, it ultimately leads to confusion, delays, and lost cash.


COREY YORK: Mike, in contrast to the quick balance sheet analysis that we discussed in our inventory podcast, this all sounds like a much more massive undertaking. Where do you begin?

COREY YORK: What are the main levers that the company can pull in order to improve any of these areas of AR performance?


MIKE PIOTROWSKI: You're absolutely right, Corey. It can feel overwhelming, but there are four levers that can drive a lot of impact. Each one is a critical piece of the puzzle, and the real magic happens when they're all working together.

MIKE PIOTROWSKI: First, strengthen your credit and collections policy. This is the foundation. It's about having a clear, documented set of rules for who you extend credit to, how much, and what your process is when payments are late.

MIKE PIOTROWSKI: For example, this might be running a credit check on all new customers or establishing a clear protocol that an account manager must be notified when an invoice becomes 15 days past due.

MIKE PIOTROWSKI: Second, improve your invoicing process. This is all about getting it right from the very beginning. Many payment delays aren't due to unwilling customers, but to clerical errors or missing information on the invoice itself.

MIKE PIOTROWSKI: We focus on making sure invoices are accurate, easy to understand, and sent out promptly.

MIKE PIOTROWSKI: A good example is a company we worked with that was frequently missing the required purchase order number on invoices. Just by adding a mandatory field to their invoicing software, they reduced invoice kickbacks by over 50%.

MIKE PIOTROWSKI: Third, implement smarter collections strategies. This is about working smarter, not harder. Instead of a blanket approach, we segment customers and tailor our efforts.

MIKE PIOTROWSKI: We use a proactive cadence, automated reminders for on-time accounts, and more personalized, high-touch follow-ups for those who are at high risk for late payment.

MIKE PIOTROWSKI: For instance, you could have a system that automatically sends a friendly reminder email five days before an invoice is due, but triggers a personal call from an AR specialist for high-value clients who are 10 days or more past due.

MIKE PIOTROWSKI: Lastly, optimize the use of technology. This is the key enabler. Manual processes are slow and error prone.

MIKE PIOTROWSKI: We help clients leverage technology to automate tasks like invoice generation, payment reminders, and cash application, which frees up the team to focus on high-value collection activities.

MIKE PIOTROWSKI: For example, a system that can automatically match incoming payments to open invoices without human intervention can save dozens of hours a week for a large company.


COREY YORK: That certainly does sound comprehensive. It seems like a methodical approach can make a difference there.

COREY YORK: But what about the elephant in the room? The fear of damaging your relationships with the customers, who I am reliably told are always right.


MIKE PIOTROWSKI: Corey, that's a very real and legitimate concern. It's one we hear about all the time, and it's why AR optimization isn't just a finance exercise. It's a customer relationship issue.

MIKE PIOTROWSKI: The key here is to shift the mindset from a confrontational us-versus-them approach to a collaborative, let's-solve-this-together approach.

MIKE PIOTROWSKI: For a company's most valuable customers, for example, I wouldn't use the same automated, one-size-fits-all approach that would be used for everyone else. Instead, I'd take a soft, strategic approach. I'd have a conversation.

MIKE PIOTROWSKI: This is where I'd bring in a senior finance leader or even a sales manager who has a strong relationship with the customer.

MIKE PIOTROWSKI: The conversation should be empathetic. You can say something like, "We value our partnership with you, and to ensure that we can continue providing you with the highest level of service and the best products, we're implementing a new process for managing our accounts. We want to work with you to find a solution that fits both of our needs."

MIKE PIOTROWSKI: This can lead to a more flexible but still firm payment plan, or even an early payment discount for those who pay on time.

MIKE PIOTROWSKI: The goal here is to set clear expectations and reinforce that this isn't a punishment. It's a way to build a healthier, more sustainable partnership for the long run.

MIKE PIOTROWSKI: A clear policy applied fairly removes ambiguity and actually strengthens trust over time.


COREY YORK: That's a powerful point, and I say that as someone who hates paying bills on time or really at all.

COREY YORK: But seriously, let's get specific. Can you walk us through a simple scenario to show us the true impact of this?

COREY YORK: If we take a company with, say, $600 million in annual sales and a current days sales outstanding of 60 days, how much cash is locked up there? What happens if they improve?


MIKE PIOTROWSKI: Corey, that's a perfect question to highlight just how powerful this is.

MIKE PIOTROWSKI: For a company with $600 million in annual sales and a 60-day DSO, they have about $98.6 million of cash tied up in accounts receivable. Let's think of that as a huge bank account that's full, but we can't make any withdrawals.

MIKE PIOTROWSKI: Now let's look at the opportunity, and we're not talking about magic here. These are real, achievable benchmarks based on cross-industry data.

MIKE PIOTROWSKI: Let's look at what happens when a company hits the median DSO number, which across all industries is roughly 45 days. Doing the math, if that company could improve collections from 60 days to just 45, they would unlock approximately $24.6 million in cash.

MIKE PIOTROWSKI: That's a massive, non-dilutive influx of capital.

MIKE PIOTROWSKI: Then let's look at what becoming a top performer means. A top-quartile company often has a DSO of 30 days or less. If our example company could reach that level, they would free up almost $49 million in cash.

MIKE PIOTROWSKI: That's a huge strategic advantage.


COREY YORK: The numbers are frankly staggering. You mentioned the benchmarks, median and top quartile. Where do those actually come from?


MIKE PIOTROWSKI: That's a key question, Corey.

MIKE PIOTROWSKI: These aren't arbitrary numbers. They're derived from the aggregate financial performance data of thousands of companies compiled by organizations like the American Productivity and Quality Center, or APQC, and various credit and finance associations.

MIKE PIOTROWSKI: They give us a clear, objective measure to compare a company's performance against its peers. It's how we know if a 60-day DSO is a major red flag or if it's just a function of a particular industry's payment terms.

MIKE PIOTROWSKI: The benefits of unlocking this kind of cash are immense, and they go far beyond making the balance sheet look better.

MIKE PIOTROWSKI: For example, when you have more cash on hand, you don't need to borrow from your bank to cover short-term operational expenses. This means you save on interest costs and keep your line of credit available for true emergencies or growth opportunities.

MIKE PIOTROWSKI: It's all about being in control of your own liquidity.

MIKE PIOTROWSKI: This unlocked cash can be reinvested directly back into the business. You can use it to fund a new product launch, upgrade technology, invest in marketing, or even pay down debt.

MIKE PIOTROWSKI: This allows a business to be proactive and agile rather than just surviving day to day.

MIKE PIOTROWSKI: Lastly, it's also important to know that a lower DSO isn't just about cash. It's a sign of a healthier operation. It means that your invoicing is accurate, your collection process is effective, and your customer relationships are solid enough to ensure timely payment.

MIKE PIOTROWSKI: It's a key indicator of overall business health.


COREY YORK: So not just a numbers game, but truly a strategic move that can fundamentally strengthen the entire business.


MIKE PIOTROWSKI: Exactly, Corey. It's about turning a passive balance sheet item into an active lever for growth.


COREY YORK: Powerful stuff. Well, that wraps up today's episode on accounts receivable optimization, a critical driver of cash flow and overall business health.

COREY YORK: Mike, thank you very much for sharing your expertise with us today.


MIKE PIOTROWSKI: My pleasure, Corey.


COREY YORK: We hope the listeners came away with some valuable insights that you can apply right away.

COREY YORK: If you prefer a more guided tour, make sure to contact us at Cherry Bekaert. We look forward to having you with us for our next episode in the Working Capital Optimization Series, where we'll focus on accounts payable.

COREY YORK: Until then, thanks for listening.


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