Do you want to improve your invoice collection process and get paid quicker? Small and medium-sized businesses depend on prompt payment from their customers/clients to support their working capital and cash flow needs. They oftentimes lack the proper tools to effectively manage their accounts receivable which makes collecting on outstanding invoices difficult.
If your business is looking to accelerate the collection of your accounts receivable, there are several strategies you can use:
Review Credit Policies and Procedures
Credit policies and procedures may not address changes in the market and industry your business serves. Your payment terms may be too liberal or not competitive. Credit requirements for new customers may need to be adjusted. Credit reviews of existing customers must be performed periodically, and credit limits must be adjusted accordingly. Customers with past-due invoices may need to be contacted earlier and more frequently.
Credit policies and procedures should be reviewed with your accounts receivable personnel to ensure they understand them. Customers should receive a copy of your credit policies and payment terms periodically.
Know Your Customer and Evaluate Credit Criteria
The best defense against late payments or bad debts is to know your customer. During times of an economic downturn or recession, you’ll be able to better judge the credit risk a customer poses. Purchasing business credit reports from credit bureaus, such as Dun & Bradstreet, Experian, or Ansonia, are a good tool for evaluating credit risk and will typically include a monitoring feature for you to be notified if there are any fluctuations with a credit profile. Additional credit information can be obtained by requesting trade/ bank references and financial statements from customers or even by simple internet searches. Information for public businesses may be more accessible on the internet by using YAHOO Finance or EDGAR on the SEC.gov website, as these companies are required to submit public filings and financials.
Timely Invoicing and Automation
If you invoice manually, don’t batch and hold supporting documents until it is convenient to process them. Invoice the same day upon completion of a service, project, or fulfillment of an order. Getting invoicing to your clients/ customers faster will allow them plenty of time to process payment within terms. Use invoice templates or invoicing software to expedite the process and reduce billing errors. The best practice, however, is to automate invoicing so there is no delay. Automation will accelerate the cash cycle helping you get paid faster and more efficiently.
Companies that automate their invoicing and collection processes reduce their Days Sales Outstanding (DSO) by up to 12 days. This means that, on average, customer payments are received up to 12 days faster with automation. Lower DSO increases cash flow and reduces credit risk. Utilizing an online customer portal will further reduce late payments.
Collection Procedures
Increased customer contact reduces late payments. Use automated email reminders and frequent calls to let customers know that you follow up for payment. Be polite but persistent. You are more likely to be paid before other suppliers that do not make frequent customer contact. On large orders, contact customers shortly after the invoice has been issued to make sure it has been received and there are no problems that will delay payment. Add a payment reminder just before the due date, and shorten the time between past-due payment reminders. In collections, the squeaky wheel gets the grease.
Resolve Disputes and Billing Errors Quickly
Disputes and billing errors are major sources of payment delays. Often businesses don’t become aware of them until an invoice is past due and the customer is contacted for payment. It can then take weeks to resolve the problem and receive payment. Whether the problem is due to a shipping error, quality issue, or invoice discrepancy, make it a priority to resolve the problem ASAP.
Discounts for Early Payment
Discounts for early payment are a good option to consider to accelerate cash flow. If your standard terms are Net 30 Days, and you change to 1% 10 Days, Net 30 Days, the opportunity cost to your customer of not paying early to get the discount is an 18.2% return on the cash. Customers will often pay early to take the discount if they have the cash available. Make sure you have the profit margins to absorb the cost.
Payment Plans
Even the best customers can sometimes get behind on invoice payments. It’s better to be flexible and work with a customer on a payment plan than get no payment at all and lose future business. In some cases, businesses release a certain amount of orders for every payment received as long as current invoices are paid on time, e.g., $1,500 in orders released when a $1,000 payment is received.
Make It Easy for Customers to Pay
Offering multiple alternatives to pay invoices will accelerate customer payments. Increasingly, customers do not want to pay using paper checks because of the cost to process and mail, and their accounting processes are automated. Make it easy for them to pay you faster by accepting credit cards, fintech payment processors such as PayPal or Google Pay, ACH, e-checks, and other methods. Automated invoices also help by eliminating mailing and processing time, and a hyperlink can be included on an electronic invoice to facilitate faster payment.
Invoice Factoring
Invoice factoring is widely used by small and medium-sized companies to accelerate cash flow to fund operations or pursue growth opportunities. It involves selling your unpaid invoices for immediate cash to a third-party, known as a ‘factoring company’ and can be provided for a single invoice or as a program for all of your accounts receivable.
Invoice factoring is fast and flexible, providing almost immediate cash flow from customer invoices. Invoice factoring is easier to obtain than a bank loan, and credit approval is based on your customer’s financial strength, not the creditworthiness of your business. It’s an excellent solution for companies needing immediate funding for their accounts receivable.
How Capstone Can Help
Collecting your outstanding invoices is difficult, but it doesn’t have to be. You work hard to generate the sales and deserve to be paid for it. With the inclusion of the above strategies into your invoice collections process, you will be able to accelerate cash flow and get paid faster.
Capstone is a leading commercial finance company that provides a range of financial products designed to meet the cash flow and working capital needs of nearly any type of business, including trade financing, invoice factoring, and PO financing. Contact Capstone to learn how invoice factoring can accelerate the conversion of your accounts receivable into immediate cash.
