Why a recession could push AR to its tipping point

We don't need to remind you that a recession may be on the horizon. It feels like we've long been pondering the possibility, with economists signaling trouble ahead. And indeed, households and businesses alike have been dealt massive blows these past few years with record inflation, supply chain strains, global tensions and most recently, the collapse of SVB — all threatening to push the economy over the edge. 

Accounts receivable teams across industries are paying particularly close attention. They are, after all, a function that, arguably, feels the wrath of financial uncertainty the most. During COVID-19, for example, they battled record low levels of cash on hand — and consequently high days sales outstanding — due to late payments or pressure from clients to extend payments terms. 

Meanwhile, during the SVB crisis, its impact on business payments was one of the most devastating outcomes. Many lost access to vital funds themselves and/or had customers that were impacted, creating an incredibly tense and uncertain few weeks for AR. 

The difference between a future recession and economic dips in the past, however, is that AR is currently at a crucial inflection point in its digitization journey. The industry has made tremendous progress with its digital transformation in the past few years, but key challenges still persist that could threaten businesses' financial health during a recession. 

Imbalance of power between AR and AP

When it comes to making payments in B2B, the balance of power has historically favored the buyer. Even as the payments world has shifted to digital solutions, payments preferences have been still largely controlled by everyone but the supplier — a frustrating reality for AR teams whose own needs often are pushed to the wayside.

But why is this? It's primarily because most buyers aren't expected to pay a bill until after they receive a product or service, giving them outsized control over how they pay given they're already in possession of the goods. 

A good example of this is buyers' use of virtual cards, which aren't streamlined for AR teams. For one, their high interchange fees are increasing the cost of acceptance for suppliers. And secondly, they don't currently integrate neatly with ERPs or other AR technologies for straight-through processing. For buyers, though, there's a rebate incentive to use them, which means AR teams are dealing with them on a more frequent basis. 

This is a common theme. A recent survey of nearly 370 AR professionals found that their biggest pain point is the lack of integration between their digital tools and processes and external tools/dashboards. Many of their buyers also use AP solutions that deliver payments and remittance via email or portal, meaning AR teams have to deal with frustrating and inefficient manually processes on top of their already heavy workloads. 

This lack of a level playing field will only make navigating a recession more challenging. It doesn't help AR teams remove many of the tedious and time-consuming tasks they were supposed to eliminate through digitization. And it certainly doesn't help them accelerate cash flow at a time when the dangers of high DSO are at their peak.

Manual cash application problems persist 

The uneven playing field also results in an incredibly tedious and error-prone cash application process for AR. For example, it creates an environment where AR has to deal with the nuances of each customer's invoicing structure on a daily basis. This, in turn, makes it hard to onboard new employees, which further slows down cash application and AR's ability to seamlessly do its job. 

These inefficiencies are damaging to an organization's financial health in ordinary times. But in a recession, where speedy cash flow becomes much more important, their impact could be dire — especially when you also take into consideration the potential for more supply chain disruptions during a recession, as well as other factors that could hinder cash conversion.

Just think of the most critical industries during a recession. In times of economic turmoil, we often count on businesses in manufacturing, transportation and logistics for growth. But if they can't fast-track cash applications, economic recovery will be much harder to achieve. 

The need for better technology integration

With a recession looming, these challenges highlight the growing need for better integration between AR technology and their customers' solutions. The good news is this gap also represents a huge opportunity to improve current functions — and boost AR's value during a downturn through digitization. 

Not only this, but new, integrated tools would help AR and AP remove the obstacles of manual processing that slow down the movement of cash today and even more so during a recession. Indeed, leveling the playing field would propel B2B accounting to new heights. On the other hand, if a recession hits before we have a chance to make updates, we'll quickly realize why there was urgency in the first place.