One of the quietest ways a company can hold itself back is poor handling of receivables. Steady sales growth doesn’t protect you from cash flow problems unless you’re also tracking the money from purchase to collection.
Cash-flow shortfalls disrupt more than the bank account. Suppliers want paid, even when money’s running low. You may have no room to pay loan installments, let alone owners or employees.
If you can’t pay people you might be forced to refuse profitable sales because you don’t have cash for the materials or labor.
There’s plenty of things that make a business succeed, but cash flow is what keeps it running.
With enough money, you can expand your company in steady growth, whether that means buying your own building or equipment to make your processes more efficient.
A Formal Receivables Process
A well-managed business has a formal receivables process and ways to spot cash troubles early and solve them. The businesses with the smoothest cash flow track invoices to encourage payment, recognize problems earlier, and make adjustments in time.
Software can help with receivables. Automated reminders and recurring invoices post on schedule and software matches invoices and posts payments as soon as you enter the bank data. Posting invoices and payments faster means money in the account sooner.
A lot of money’s owed late because the two sides haven’t agreed when the money’s due, how much, or how they’ll pay. Collecting owed money is easier when they’re on the same terms from the beginning.
Waiting until a payment’s late is a mistake. The sooner you start the conversation, the more each side’s on the same schedule. Be proactive, and make sure your clients know exactly when payments are due.
You usually have that conversation while you’re bringing in a new client, and you might have it again if you change billing systems or if an older client gets in the habit of paying late.
Make it as simple as you can for clients to pay. Nothing missing or out of place. If anything’s missing or misleading, your client’s accounting team is likely to flag the invoice for review and hold it up.
If there’s invoices where the money’s headed your way but hasn’t landed yet, your bank can help speed things up. Your bank offers cash management services, and if you’re working with the business bank when collecting invoices, there are services to reduce the money’s time in the mail.
ACH lets clients pay you electronically, cutting down on mail service time. And it cuts off the excuse the check’s in the mail.
You can also save time collecting payment with lockboxes. It’s a service where clients mail checks to a Postal Box your bank oversees. The bank gets the checks and deposits the money to your account immediately.
Some cash-flow strategies work for everyone, some don’t. Talk with a banker or owners in your industry to find out which tools fit your model. If your clients pay by check, a lockbox makes sense.
The right bank is one that meets you where you’re at, learns the details of what you’re doing, and brings the right tools. You may need a combination of cash-flow tips like ACH, invoice software, or lockboxes, or you may need a different solution based on what your clients pay.
The more efficiently you manage your invoicing, the more efficiently you’ll run the rest of the business. You have more time to grow your revenue instead of chasing receivables. Staff spends more time on things customers notice.
Don’t forget early-payment discounts. It encourages clients to pay sooner. Customers on 2/10, net/30 terms take 2 percent off for paying in 10 days instead of 30. This way, you collect sooner.
Whether it makes sense depends on your margins. In tight-margin industries 2 percent is a lot of money. In a high-margin industry, or where you’ve got a little extra, discounts encourage early payment and improve cash flow.
Before offering a discount, ask your banker or people who know your industry whether it makes sense for you.
There’s so many ways people can pay, if you only take cash and checks you slow yourself down. Merchant processing isn’t just credit cards anymore. There’s debit cards, mobile wallets and other options.
The Collection Process
Late invoices need chasing down. The older a receivable gets, the less likely you are to collect all or any of it.
A well-run company knows exactly what’s owed and which accounts are overdue. The sooner you contact a client, the better your chance of collecting on time.
Your company should have a rule that whoever runs the receivables department contacts the client on day one of lateness, so they know you’re watching it.
If you aren’t charging interest on overdue bills, start. And stick to the rate. A penalty pushes clients to pay before they’re late.
If you still haven’t received payment after that first contact, get firmer. Send an email or letter detailing what’s owed and that payment is due by such and such date. List what happens if payment arrives past that date, including possible legal action.
Clients that pay late should understand what’s at stake. They won’t always do it deliberately. They might need time to sort out the confusion or fit the cost into their budget. The goal isn’t to lean on them but find out why they’re late so you can work together and solve it.
On big orders or sales, a deposit protects you in case of trouble. If something falls through, you have less money tied up.
Say a customer has been late before but pays when you send out reminders. This time, they say they’re short of cash and ask for an extension.
A payment plan encourages them to pay something, then catch up later.
Payment plans build client loyalty, especially with people you do a lot of business with.
Keep a paper trail. Put the plan in writing and both sides should sign it. And put new orders on cash-on-delivery (COD) until the account’s caught up again.
The front line has regular contact with clients and customers. Train these people in the collection process, as well. If someone has trouble making a payment, give them a direct channel to bring it up, before accounts get late. The smoother collections are, the smoother your cash flow and business.
An expanding client base looks good but doesn’t help you much if they aren’t paying. You still need steady payments to have steady cash flow. If a client takes too much chasing to collect on, it may be they’re not a good fit for your business.
It’s difficult saying no to business but screening clients helps save money. Check a prospect’s payment history or get references to avoid clients who spend money they don’t have. A prospect that pays its other bills late will probably pay you late too.
Some big corporations stretch vendor terms to 90 or 120 days. If the rest of your client base pays in 30 days, you can live with a few clients that wait longer to pay.
Landing a big national client is an incredible win for a small business. But you’ll balance cash flow better mixing bigger clients with smaller ones. They usually owe bigger amounts, but you collect from the smaller clients sooner.
Sending uncollected money to a collection agency should be your last resort. So it should only be for things you can’t collect or that would have cost you to collect.
You usually don’t get everything you’re owed from the agency. It’s better to get something rather than nothing at all.
Monitor What’s Due and How Late Payments Are
You should always know how late a payment is so you can ask about it before it gets past due. An accounts receivable aging report is the best tool to monitor what’s due and how late payments are.
The aging report divides accounts by how long ago the invoice posted.
- 0 to 30 days old
- 31 to 60 days
- 61 to 90 days old, and 91 days and older
The report also shows how much clients owe. Review it often, so you spot invoices before they become past due.
Look over financial statements, along with your receivables aging report. They help spot trouble and tell you if your fixes are helping or not. Not looking at the numbers each week is like driving cross-country without a map.
Accounts receivable turnover (ART) shows the number of times you collect your average receivables each year.
Calculate accounts receivable (AR) turnover with this formula.
Start by listing your net annual credit sales, then divide it by average accounts receivable. You’ll find your average accounts receivable by adding the beginning receivable amount to the ending receivable amount, then divide by two.
A turnover of 10 means your average invoice takes 36.5 days to collect.
Turnover also gauges how well you extend credit and get it repaid on time.
A high ratio usually means your collections are working. A low ratio’s usually a sign to rethink your collection strategy and the credit terms you give clients.
Where your aging report shows the age of individual invoices, ART focuses on the big picture. You can look over ART every week and get a quick read on how your collection process is working.
About Delancey Street
Delancey Street is a premier, and award winning, business debt settlement company that helps business owners nationwide. Our goal is simple: help you escape debt in a safe and legal manner. Based out of New York, we can help in 49 of 50 states. We tell you how it is; because your business and future is on the line.
