A finance approach to improving credit, billing, collection, and cash flow in BtoB transactions

In BtoB transactions, many businesses feel the limitations of analog business flows. Busy with monthly invoice issuance and payment confirmation, ...... unable to devote time to core operations that should be focused on. Furthermore, we may be facing management issues such as the risk of uncollected assets that increase as the number of trading companies increases and the deterioration of cash flow.

In recent years, in response to the wave of digital transformation (DX), the number of companies that have introduced SaaS such as invoice management systems to improve operational efficiency has increased rapidly. However, even if systematization reduces "work", it does not solve essential issues such as delayed payments from business partners, "uncollected risk" due to bankruptcy, and "cash flow problems" caused by prolonged payment sites.

In this article, we will summarize in detail the basic flow of BtoB transactions and the issues in each phase, and explain the option of the "finance approach" that leads to true problems that cannot be solved by system introduction (SaaS) alone​.

The basic flow of BtoB transactions and the "invisible issues" hidden in each phase

First, visualize the flow of a typical BtoB transaction andsort out the invisible costs and risks lurking in each phase. Unlike BtoC (consumer transactions), business-to-business transactions are structured to create bottlenecks in various places due to the wide range of departments and procedures involved.

1. Credit management: Bloated screening man-hours and difficulty in identifying

When it comes to starting a new trade, it's hard to avoid credit check. The process of researching the financial and credit status of the counterparty and setting transaction limits takes a lot of man-hours.

In many cases, the sales department will order financial statements and commercial registers, and accounting and Legal Department will conduct the review. However, the screening criteria for startups and SME are easily individualized, and there are cases where they fall into a trade-off situation of abandoning the transaction for fear of risk (= loss of opportunity)or causing bad debts later due to a lenient screening. Thisdifficultyis the first barrier that slows down a company's business expansion.

2. Billing: Human costs and operational risks of issuance and dispatch

Billing operations occur after a transaction is concluded and goods or services are provided. The issuance and sending of invoice concentrated at the end of the month places a heavy burden on accountants.

There are a lot of manual checks, such as specifying different closing dates and formats for each business partner, calculating sales tax and withholding tax, etc. In an environment where the system is not introduced,human error (operational risk) such as misinput of amounts and omissions is likely to become apparent, which can lead to secondary damage such as loss of credibility from business partners and delayedpayments.

3. Collection and clearing: Frequent irregular responses and psychological burden

Check if your payment is on timeClearing workis also a very complicated task. The work of checking the deposit history of the bank account with the issued invoice one by one is the difference in the transfer holder and the difference in the transfer fee.It is prone to irregularities and forces visual and manual checks。 If the payment cannot be confirmed, the sales representative or accounting person will send a message to the business partner.Supervisemust be done. This is a huge psychological load for personnel and significantly reduces the productivity of core operations.

4. Emergence of the risk of uncollected (bad debts)

One of the most serious management risks is bad debts due to bankruptcy of business partners that occur after payment delays. No matter how much sales are recorded, if the sales proceeds cannot be collected, profits will be lost, and cash will flow out for the cost of purchasing. A single bad debt in a BtoB transaction tends to be large in amount, which can be a fatal injury that shakes the company's financial foundation.

Is SaaS adoption not enough? "Limitations" that cannot be eliminated by operational efficiency

One approach to these issues is to "introduce a invoice management system (SaaS)". Certainly, the system will automate the issuance and clearing of invoice, and dramatically improve operational efficiency.However,from a financial and management perspective, such as managing the credit of business partners, avoiding uncollected risks, and cash flow, there are certain limitations.

Even if operations are streamlined, the "risk of unrecovered" remains.

SaaS is only a software to optimize "internal business processes" and does not have the function of ensuring the credit status of business partners. Even if a system is in place to automatically issue and send invoice, if the billing company goes bankrupt, the sales proceeds will not be collected. In other words,the introduction of SaaS is directly linked to the reduction of work costs, but the fundamental management risk of the business partner's credit risk (uncollected risk) remains untouched.

It does not directly lead to improvement in cash flow

In addition, long deposit sites such as "closing at the end of the month and paying at the end of the next month (or paying at the end of the next month)" unique to BtoB transactions cannot be shortened by simply introducing an in-house system. The more you try to expand your business, the more expenses such as purchasing costs and labor costs will be incurred in advance. Even though sales on the books are rising, there is a risk of running out of cash on hand and in the worst case, falling into surplus bankruptcy.To improve your company's cash flow, you need to have a drastic financial strategy that utilizes external resources, not just operational efficiency.

"Three finance Approaches" to Strengthen Management

Another important Management Strategy beyond the efficiency of internal operations through SaaS implementation. This is the "finance approach" that leverages payment processing company companies and finance services to externalize risk and improve liquidity​.

By incorporating the following three solutions into the BtoB payment ecosystem according to the business phases and issues faced by business operators, it will lead to the establishment of a solid management foundation.

Approach 1: Deploy a payment platform (consolidate diverse payment method and stabilize collection)

In BtoB transactions, the introduction of various payment method such as Credit card payment and corporate buy now pay later payment is very effective.

By utilizing the infrastructure of payments provided by payment processing company companies, businesses can introduce and manage multiple payment method at once, including "invoice payments" unique to companies, and unify complicated settlement operations with financial institution such as credit card companies and banks on a single system. In addition, when introducing infrastructure of payments, it is easy to integrate with your company's existing systems and e-commerce sites, and "processing speed and stability" to prevent loss of opportunities due to system failures are also important selection criteria.

Approach 2: Accounts Receivable Guarantee Service (Avoidance of Uncollected Risks and Externalization of Credit)

If you are concerned about the lack of credit check know-how or the risk of bad debts when developing new business partners, utilizing external accounts receivable guarantee services can be a viable option.

This is a mechanism in which the guarantor company enters between the business and the business partner and assumes the risk of accounts receivable within a pre-set framework. In the unlikely event that a business partner goes bankrupt or fails to make a deposit, the accounts receivable will be covered within the specified range, avoiding serious situations such as serial bankruptcies.

Compared to conventional credit insurance, it is characterized by speedy screening that can be completed online and many cases where guarantees can be flexibly issued from even one company. This can significantly reduce the burden of cumbersome credit check and dunning tasks on their own.

The main benefit of externalizing risk is that it directly leads to improved KPIs for the sales department.It prevents lost opportunities to refrain from approaching sales for reasons such as "because it is a newly established startup" or "because there is no transaction Actual", and it is easier for those in charge of the field to actively develop new products with peace of mind. In addition to such "defense", accounts receivable guarantees are used as a weapon of "offense" to drive business growth.

Approach 3: Factoring services (rapid improvement of cash flow)

If you want to improve cash flow on hand and accelerate the speed of business investment, factoring to capitalize accounts receivable early is effective.

In BtoB transactions, long payment sites that "wait 1-2 months from delivery to payment" are common, but in the phase of rapid business expansion, purchase prices and advertising costs come first, so even if you are in the black, it is easy to tighten cash flow. Factoring is a mechanism in which a business operator transfers the confirmed accounts receivable held by a business partner to a factoring company, etc., to cash out payments that are originally several months in advance in the shortest possible days.

The advantage over bank loans is that they can raise funds while keeping their balance sheet slim without increasing borrowing (liabilities interest). In addition, since the main axis of the examination is not only "the creditworthiness of the company" but also "the creditworthiness of the receivables (business partners)", it tends to be easy to cash out quickly even for venture companies and SME.

By using these services, it is easier to quickly secure funds for large-scale projects, advertising costs, and system investments without waiting for additional loans from financial institution. It can be said that it is a powerful financial option to achieve "aggressive management".

finance The shift to "aggressive management" brought about by the approach

By entrusting the "defensive" process of risk management and recovery operations to external infrastructure, it will be possible to focus resources on the "offensive" activities that are the original mission of the company.

When the burden of credit check and billing work increases, it can hinder the sales activity itself, such as too careful screening for fear of risk, and accountants being overwhelmed with dunning work.

By mitigating concerns about uncollected risks through a finance approach,sales departments can remove the psychological brakes and create an environment conducive to bullish proposals and new developments.The payment finance approach goes beyond mere operational efficiency and is a key factor in driving business growth as a Management Strategy.

Summary: The best choice for the business phase of the business

The issues of "credit, billing, collection, and cash flow" in BtoB transactions are fundamentally difficult to solve by simply using the IT of internal systems. In order to truly strengthen your management foundation and increase your competitive advantage in the market, it is useful to consider a "finance approach" that realizes the externalization of uncollected risks and the acceleration of funds.

"What kind of approach is suitable for your company?" and "Where are the risks lurking in the current business flow?"

Why don't you take this article as an opportunity to first reconsider the current situation of your company's billing operations and cash flow?

Building a payment ecosystem that balances risk externalization and improved cash flow is a solid foundation for surviving a rapidly changing business environment. As a hint to solve your company's problems and realize aggressive management, please refer to the perspective of the "finance approach" unraveled this time.