Entrepreneurs and leaders:
Below is the week six memo that was sent to our CEOs across the country on Sunday, April 12.
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In normal times, finance and sales engage in a carefully choreographed playbook to reduce the accounts receivable (A/R) line item. They focus on aged receivables and occasionally there is a requirement for a specific customer strategy. In a black swan, however, A/R payment equals survival.
Last week, I was talking with a CEO and CFO about cash runway and a question surfaced: Is there a good way to assess customer credit-worthiness? The credit-worthiness question is one of risk. And the risk impact shows itself in the A/R line.
Assessing Credit-Worthiness
Below is a framework that attempts to capture the inputs you need to assess the credit-worthiness of a customer.
The framework lists seven drivers of credit-worthiness, each of which has its own distinct weight, illustrated by a heat map.
At the end of the chart, append three additional columns, that uses the heat map to describe three impacts to your business.
Your completed Framework should resemble this:
Click here for the Excel version of the above framework.
A Call-Out Regarding Product Usage
You are about to get the clearest understanding of the true value of your product in the next nine months. This test will come from your large and medium customers who have the ability to pay. Warren Buffet’s famous quote is: “when the tide goes out you see who has no clothes on.” Or, as I say: “when the swan is in the water, the need to have products swim to shore and the nice to have products get washed up.”
Your finance, sales and customer service teams should have a daily product usage tracker established as a critical feedback loop. Perhaps you have this now but is it wired across all stakeholders supporting the A/R line item? Is it a discipline as natural as closing the books or delivering the roadmap commitments or paying the commissions? The usage pattern becomes the arbiter of renewal or churn. Usage is an upstream metric while A/R is downstream. Upstream things have a wider perch for seeing what is happening in your business.
Interpreting the Results
My view is product value, customer size and sector concentration should be weighted most for A/R risk. For purely a customer credit-worthiness assessment, customer size and sector concentration are the most deterministic. A color scheme was used here to be more illustrative since each of you are different. You could use a numeric scoring system as well. As you can see, this matrix can become a binomial based on all the possible combinations. That is too complicated and unnecessary.
The March accounting books are closed. The terms of net 30, 60, 90 are happening. The first feedback loop from customers is underway in the black swan. This exact matrix might have minimal value but I hope it confirms or catalyzes you to institute a biweekly, multi-department meeting with a standard matrix that captures a full 360 degrees voice of the customer from all your front-line players.
A/R is connected to relationships, reputation, roadmap, retention, return and RESILIENCE.
Many blessings to you and your families,
Edison Partners