Cash Flow Management – Improve Collection of Accounts Receivable
Effectively managing accounts receivable (A/R) can mean the difference between being cash flow positive or negative for a given period of time. Any company that extends credit to its customers is at risk with its cash flow management; in fact most companies should not accept purchases on account. Doing so makes you both a service/product provider and a bank with additional responsibilities. Then, there is always the risk that customers may take longer than the agreed upon terms to fulfill their obligation or that they may never pay. A net 30 invoice might turn into a net 60 and in some cases into a net 90. However, if a company must accept A/R, there are techniques to mitigate the risk inherent with extending credit to customers. All these recommendations will not work for every company and may need to be modified to fit specific circumstances. In the end, effective and efficient collection of accounts receivable is a key component of good cash flow management to keep your company in business. Below are four ways to improve collection of accounts receivable.
1. Thoroughly track accounts receivable. As simple as it may sound, it’s easy to overlook. When dealing with all of the other aspects of running a company it is easy to get side-tracked and forego accounts receivable collection responsibilities. However, there should be no excuse; this is easy money. Whoever is in charge of finance should, at the very least, keep a spreadsheet of all customers that comprise accounts receivable. The list should be arranged by due date, and it should be updated at least weekly. Some accounting software packages can trigger alerts when an account is overdue or coming due, which will make the tracking process easier. The main take away is that an accounts receivable tracking system, whether automated or manual, can benefit accounts receivable management because, according to Joseph Benoit from Entrepreneur.com, “The sooner you’re aware of late payments, the sooner you can take action.”
2. Clearly state the terms of payment, and do not deviate. On every invoice there should be a clause that explains what happens if the payment is late. For example, “If the invoice is paid after X (due date) then you will be charged a penalty of Y percent, which will increase the amount due to $Z.” When they clearly see the consequences for paying late, customers are more likely to pay on time to avoid penalties.
3. Offer a small discount for early payment. Unlike the last recommendation where the goal is to collect the payment on time, the goal of this technique is to collect payment earlier than the due date. Doing so will reduce your overall accounts receivable balance and free up some much-needed cash. An effective tactic to encourage collection of a payment before the due date is to offer a small discount, such as two or three percent off, if the payment is received within 10 days of billing and thus 20 days before the net 30 agreement. This is not the best option to use for all invoices, but in certain circumstances when quick payment is needed this approach can payoff.
4. Call the customer after sending out the invoice. A useful practice that any company should get in the habit of is calling customers a week or so after the initial invoice has been sent out. The focus of the call is not to be a pest but rather to ensure that the customer received the invoice and has all the documentation it needs to fulfill the commitment. This creates a relationship with the customer’s accounting department, and if the customer ever has insufficient documentation or encounters any problems with the invoice, the problem can be caught early and resolved.
Remember that even though you want to pay attention to your company’s bottom line, you are paying bills from cash, not from the profits on your books. Paying close attention to managing your receivables is vitally important if you want to keep being able to pay those bills and earn that profit.
To learn about other aspects of managing your company’s cash, download the free whitepaper, “Avoid Cash Flow Catastrophes.”