How to Prepare AR for Economic Uncertainty

Lisa Lansaw, AR Director at Nidec Motor Corporation

Tariffs and other economic challenges are making headlines, but the real story lies in their unseen effects on your business—especially your cash flow. If you’re concerned about longer payment cycles, more invoice disputes, and growing credit risk, you’re not alone. The ripple effects of tariffs on accounts receivable (AR) are a fact of life, and many financial leaders are sounding the alarm about the risks to liquidity.

How Tariffs May Impact AR and Strategies for Risk Mitigation

The implementation of new tariffs on imported goods is causing concern across industries due to the cascading financial implications throughout supply chains. For businesses, one of the most immediate risks is the impact on accounts receivable and the resulting pressure on cash flow. Many industry analysts are discussing these risks, emphasizing the need for proactive measures to mitigate the challenges.

Potential Impacts on AR:

• Extended Payment Cycles: Customers facing higher input costs may request extended payment terms to manage their cash flow, resulting in a strong probability of an increase in aged receivables and a higher Days Sales Outstanding (DSO).
• Disputed Invoices: Customers may contest price increases or additional charges linked to tariffs, leading to delays in payments and elevated deduction activity.
• Increased Credit Risk: Marginally profitable customers in impacted industries may face insolvency, resulting in a rise in defaults and write-offs.
• Customer Relationship Strain: Tariffs may lead to tensions over pricing, reducing collaboration on payment commitments and fostering disputes.

Key Actions You Should Take Immediately

To proactively find and address risks to cash flow in light of recent tariffs and global trade tensions, AR leaders should take the following steps:

• Conduct a comprehensive AR risk assessment
• Identify customers and industries at risk
• Engage with at-risk customers
• Tighten credit policies
• Enhance real-time credit monitoring
• Strengthen collection strategies
• Explore alternatives to credit insurance
• Improve internal cash flow forecasting

Strategic Recommendations:

• Collaboration with Sales and Legal Teams: Align on consistent messaging regarding tariff-related price adjustments and ensure contracts support dispute resolution mechanisms.
• Stakeholder Engagement: Maintain communication with the board and key stakeholders to provide updates on AR trends and risks tied to tariffs.

The Power of Digital Transformation in Mitigating Tariff Risks

Digital transformation is a critical tool in managing and mitigating the risks imposed by tariffs. By leveraging automation, analytics, and AI-driven solutions, AR leaders can enhance their ability to predict, track, and manage financial challenges efficiently. Key benefits include:

Enhanced Risk Visibility:

• Advanced data analytics and AI can provide real-time insights into customer payment behavior and credit risk, allowing proactive interventions.
• Predictive analytics can forecast potential disruptions in cash flow due to tariff-related slowdowns.

Improved Efficiency in Collections:

• Automated invoicing and payment reminders reduce delays in collections and improve cash conversion cycles.
• AI-driven collections software can prioritize follow-ups with high-risk customers based on real-time payment patterns.

Seamless Credit Monitoring:

• Cloud-based platforms integrate with credit bureaus and financial databases to provide instant updates on customer risk profiles.
• Automated credit scoring models can quickly adjust credit limits based on changing tariff conditions.

Optimized Working Capital Management:

• Digital financial planning tools enable CFOs to model multiple tariff impact scenarios and adjust cash reserves accordingly.
• AI-powered treasury management systems optimize liquidity planning and mitigate the risk of cash shortages.

Strengthened Supplier and Customer Collaboration:

• Digital portals facilitate transparent communication with customers regarding tariff-related price adjustments and payment expectations.
• Blockchain-based trade finance solutions enhance transaction security and expedite international payments.

By embracing digital transformation, businesses can build a resilient AR strategy that adapts to evolving trade conditions and minimizes the financial impact of tariffs.

Industry Insights and Stakeholder Discussions

The broader business community is increasingly vocal about the heightened risk tariffs pose to cash flow. Industry forums and analysts are spotlighting these challenges, urging businesses to adopt proactive measures to safeguard liquidity and avoid severe financial strain. While credit insurance is a common fallback, its costs and limitations mean that alternatives must also be explored.

Additionally, businesses that delay addressing these risks may find themselves at a competitive disadvantage. Early adopters of robust risk management practices are better positioned to maintain strong customer relationships, protect cash flow, and adapt to changing economic conditions.

The potential impact of tariffs on accounts receivable is significant, and businesses must act decisively to mitigate these risks. By adjusting credit policies, strengthening collections, and leveraging alternatives to credit insurance, organizations can reduce exposure and maintain financial stability. As the conversation around tariff-induced risks to cash flow continues, companies that proactively address these challenges will not only weather the storm but also build resilience for future uncertainties.