In the ever-evolving landscape of private equity, one factor remains paramount: the ability to maintain a healthy cash flow and liquidity position. As EY Private Equity Pulse reported in October 2023, a staggering 80% of private equity firms are paying closer attention than ever to helping portfolio companies gain visibility into their cash and liquidity needs. With interest rates soaring and the revolving debt trap looming, effective cash management has become a top priority.
It All Begins with Cashflows
Private equity firms understand the importance of running lean and mean operations, while also maintaining a deep understanding of their portfolio companies’ financial health. Consistent visibility into financials is crucial, as it allows for realistic growth targets and plans to be set. This all begins with cash flow, which is intrinsically linked to collections. While a magic wand solution may seem appealing, the reality is that a proven three-step approach is necessary to achieve ongoing portfolio company liquidity.
Step 1: Assess and Triage
The first step in any repair process is identifying and stabilizing the problem, and collections is no exception. It’s essential to gain a solid understanding of the state of your accounts receivable (AR) – your issues, strengths, weaknesses, and existing procedures. From this baseline, you can determine your goals and the gaps in your practices, enabling you to create a plan to address both, including developing initial structures and processes.
During the “cleanup” phase, you’ll need to answer tough questions:
- Is there anything that is truly uncollectible?
- What needs to be written off?
- What is the plan for each open invoice?
- What is the current Days Sales Outstanding (DSO)? What does it need to be? What are the steps to achieving it, and how quickly can it be done?
Step 2: Establish Daily Cashflow Reporting
Cashflow is the lifeblood of a PE-backed company, so you need to know how it’s trending in near real-time. Reports should not be limited to who owes what and for how long. You need a current Receivables snapshot – in addition to all the information necessary to get paid.
If you want AR to work for your business, you should minimally build reports that cover:
- Primary contacts, secondary contacts, and organizational structure
- Internal responsibilities and individual tasks with status
- Individual invoices: balance, age, communication history, partial payment(s)
- Client overview: total amount owed, invoice date(s), average DSO, relationship length, creditworthiness
Step 3: Institute Process-Based Automation
Working capital is key to sustained growth, so your ultimate goal is ensuring continuously healthy cashflow. And that’s where processes and automation come in.
Once you achieve a cash-positive position, you can – and need to – develop a long-term strategy to maintain that momentum. First, create rigor around the AR function. That means developing, documenting, and training on best-practice-based processes and controls. Once you’ve done that hard work, you’ve earned the right to automate. Remember:
- Every invoice counts
- Manual workflows drain you of precious time and money
- Standardization is the key to globalization
- Regular communication and payment self-service and flexibility improve experience and get you paid faster
- Real-time information keeps everyone aligned
About FINNEA Group and Quadient AR by YayPay
FINNEA Group is a boutique investment banking, strategic, financial, and operational consulting firm led by a team of experienced professionals offering tailored solutions. Established in 2008, FINNEA Group was founded on the belief that clients are best served by an investment banking and consulting firm equipped with a team of talented finance professionals unencumbered by the conflicts of interest inherent to large, multi-product financial institutions. With their specialized expertise, FINNEA Group is making a difference by providing PE firms and their portfolio companies with customized strategies to optimize cashflow and liquidity.
Quadient AR by YayPay is an intelligent AR automation platform that helps B2B Finance teams collect cash faster while working 3x less. Having processed $53.16B in AR in 2023, Quadient AR automates the order-to-cash cycle from credit to collections to cash application. This delivers an effortless experience that creates high-value customer interactions and accelerates cashflow. As part of Quadient’s suite of customer experience solutions, Quadient AR by YayPay is transforming how businesses manage cashflow through intelligent automation and meaningful customer engagement.
To learn more about how you can deliver on PE cashflow expectations with triage, reporting, and process-based automation, contact the Collections experts at FINNEA Group (ACrawford@FINNEAgroup.com, 248-840-4924).
