Most small and medium enterprises in India shut shop within the first two years of operations. In fact, only a handful make it past five years. While lack of experience and planning are often cited as reasons for SMEs to fail, the number one reason for failure is lack of funds. Second, critical reason for these companies to fail is the lack of financial analysis and a system of review.

The problem of funds and financial review is exacerbated due to the long payment cycles, and overdue payments that these companies have to deal with. A majority have accounts receivables well in excess of two months. The delay in payments leads to an obvious cash crunch, which in turn affects the operational efficiency and in the long-run the viability of the business.


Debtor Days in Small & Medium Enterprise Segment: % of enterprises

Sources: LinkedIn Pulse, SME times, SIDBI, India

However, it is possible for SMBs to manage their accounts receivables. Companies that have fully integrated their accounts receivables to their billing systems have found that on average they have 26 percent fewer overdue accounts receivable than companies that use separate systems for managing billing and receivables. Implementing an ERP system ensures that the two systems are integrated. The receivable management features drive down the cost of finance and reduce Days Sales Outstanding (DSO), these reduce credit risk and bad debt write-offs. These in turn improve cash flow and release working capital to support business growth.

These are the different ways an ERP helps you achieve greater financial stability:

  • Credit Limit Checks: Clearly defined credit limits are automatically checked by the system at the point of order entry or delivery so that cancellations can be avoided. These credit checks can be applied based on amount overdue, period overdue and total outstanding amount to suit different business situations. Business workflow regarding credit-blocked orders automatically routes approval or credit extensions to the mobile phones of approvers.
  • Payment Terms Control: Payment terms can be centrally defined and controlled without any room for human errors. Businesses often give cash discounts to encourage early payments. An ERP can implement these automatically depending on the payment dates. On the other hand companies also charge an interest on overdue payments which can also be calculated and accounted automatically by an ERP. These measures help improve collections.
  • Credit Management Decision Support: DSO report is available online to monitor the health of credit management. Similarly ageing analysis of receivables is also available. Since the information on invoicing, business volumes, disputes and payment history is available online, companies can apply analytics techniques to generate their own credit ratings and decide payment terms for customer systematically, rather than use ad hoc rules. Better credit decisions lead to fewer bad-debt write-offs, reduced credit risks and improved customer satisfaction which boosts the bottom line.
  • Electronic Invoicing and Collections: Using ERP software, dispatch departments can efficiently create and send invoices to customers. It also allows customers access to their bills through a self-service portal, where they can make payments electronically. Some companies choose to present and send invoices electronically in PDF, EDI or XML format to a portal. Through this portal, customers have access to self-service functionality. Even if items are being disputed, customers can create a dispute case online. However, as invoicing in an ERP is integrated with dispatches and orders the chances of billing errors leading to payment disputes are eliminated. They can also initiate payments through electronic fund transfers if they are equipped to do so.
  • Automated Dunning Letters: A dunning letter is a notification sent to a customer, stating that a payment is overdue. It always states the amount due, the date of the unpaid invoice, the number of the invoice, and any late payment fines or interest penalties. Dunning letters are frequently generated by the ERP, with no human intervention. The ERP can be configured to use a particular text if payment has not been made within a certain number of days, and to then use a different text for letters generated after a longer time period has passed without payment. A dunning letter can be sent automatically by an ERP as a fax, e-mail, or even a text message.
  • Customer Interaction Management: Sales reps frequently communicate with customers regarding payments. They come across various disputes based on deliveries and payment terms for which there is either a payment hold up or deductions are made. It is critical to track and resolve these disputes in a timely manner. An ERP allows for such disputes to be tracked and link these with various deductions. Once a payment is received or a credit note is raised the dispute is automatically resolved. It is also possible to record customer promised payment dates and create alerts to be sent to the concerned reps on those dates for efficient collections.

Do you want to take a strategy-based approach that streamlines, accelerates the collection of outstanding/ overdue receivables while minimizing customer conflict? Improve your cash flow, maximize the working capital & nurture your customer relationship while keeping the costs in control, the need of the hour?

If the answer to the above is ‘Yes’, perhaps it’s time for you to look for a robust & efficient ERP.

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