AR in Asia: Strategic Outlook for 2021

AR in Asia: Strategic Outlook for 2021

Asia has been, and is projected to continue to be the fastest growing economy in the world in the coming years. Yet, in many regions and sectors of this economy, payments to suppliers are made slowly and cash and credit is tight. For example, the average Days Sales Outstanding (DSO) in China is 92.

AR in Asia: Strategic Outlook for 2021

The Challenges and Opportunities:

  • Economic growth in Asia region s forecast to be 6-7% this year and 4-5% in 2022. China’s economy alone is expected to grow 8.8% this year and India’s 10.2% as per Oxford Economics
  • Nonfinancial companies are carrying more debt than before the Great Recession of 2007. 25% of this debt is non-investment grade
  • Governments’ Financial Crime Compliance regulation is expanding in scope, depth and with higher penalties than ever before. Consequently, compliance is consuming more of Finance Staff and CFO time
  • Credit risk, extended payment terms, and delayed payments are major concerns of CFOs
  • Automation of Financial processes, cyber security, and enhanced Analytics have become important priorities for CFOs in Asia

Small and Medium Enterprises (SMEs) provide approximately two-thirds of jobs and almost half of GDP. Yet, they are the most threatened by the current economy. Their DSO is double that of larger Asian companies (88 vs 42), and bad debt is increasing.

To counter this cash flow (and bad debt) challenge, SMEs are paying their suppliers late and borrowing money. Borrowing is from all sources: personal funds, credit cards, factoring of invoices, and other forms of supply chain finance. This is not sustainable for many of them.

It certainly appears that a credit/insolvency crisis looms. It’s one thing to have tight cash and tight credit in a slow or no growth economy. But in a high growth economy, the need for cash is voracious. How will it end? Many failures of small companies resulting in high unemployment and a slumping economy? And 90% of the business and revenue be enjoyed by a small group of huge companies? Not an attractive outcome!

So, how can these challenges be met and overcome?

The fundamentals of excellent AR Management will, as always, provide much of what will be required to meet the AR challenges of 2021 in Asia. Tight credit controls to prevent exposure to financially weak customers is a must. Professional, organized, timely collections are required to maximize cash flow. Many firms are reluctant to engage in this, but that’s a mistake. Financing your customers’ failure to pay their debts is an unsustainable business model.

The other major solution to these challenges is digitization and automation. Digitization to move on from paper-based transactions and accommodate remote work environments. Automation to increase productivity, accuracy, AR portfolio coverage, faster customer response, higher quality credit vetting, and analytics capability.

Automation applications for the processes of AR operations and management have been used for decades, embedded in ERPs and available as separate applications. However, the emergence of newer technologies such as Robotic Process Automation (RPA) and especially Artificial Intelligence (AI) Digital Assistants have increased capabilities exponentially in the past few years in Credit Risk Management, Collections, Payments Processing, Deductions and Cash Application.

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