Too often, a company’s management team gets caught up servicing customers, producing goods and chasing sales leads — and collections fall through the cracks. Before long, however, lax collections practices can lead to cash flow shortages. Here are five helpful tips on expediting collections.
1. Check your receivables
The source of every company’s cash flow is its customers — and it’s with them that you can identify ways to keep your business liquid. Start by evaluating when your customers are paying you. Compare your accounts receivable turnover ratios and collections practices to industry norms.
If you request payments later than your competitors, it may be time to shorten your cycles to get money coming in faster. Step carefully with your most important or largest customers, however. You don’t want to rock the boat unnecessarily.
2. Re-evaluate your technology
Many companies have implemented an automated collections system that generates invoices when work is complete, flags problem accounts and provides useful financial reports for management to review. QuickBooks users, for example, can set up automated invoice reminder emails to help alleviate manual handling of collections efforts.
If your accounting or bookkeeping software is outdated or underused, your cash flow may suffer from a lack of relevant information and poor follow-up. Today, many software providers offer cost-effective, user-friendly solutions that can integrate with your company’s operating systems and simplify invoicing and collections. Your CPA can help evaluate whether you’re using the right software for your needs — and maximize its functionality.
3. Strengthen your relationships
Another way to improve (or at least stabilize) your cash flow is to strengthen your relationships with key customers. For example, you could offer value-enhancing add-ons (helpful information, discounts on other services) to select customers. Also, offer rewards for referrals. Special discounted pricing for key customers is another way to retain your best payors.
But don’t cut margins so low that even the slightest mistake could trigger a financial disaster. And avoid price wars with competitors, because such endeavors can ultimately lower profitability — even if you’re the “winner.”
In addition, prioritize customer service. Although maintaining and boosting cash flow is important, consider how any related decision will affect customers. One way to ease procedural or service changes: Empower the employees who most frequently interact with customers by giving them the authority to make things right, should confusion arise or a mistake occur.
4. Make collections everyone’s job
Poor collections are often blamed on office personnel, but almost every employee has a role in the company getting paid. Salespeople are your front line: They must obtain accurate billing information from customers (phone numbers, email addresses and names of payables personnel), and request approval to perform credit checks. They also need to negotiate sales terms that will help get money in the door faster. The owner, CFO or other appropriate leader should approve all new customers and terms for sales over a certain dollar amount before the accounting department sets them up in the system.
Behind-the-scenes workers may not think they have a role in the collections process but they often do. For example, machinists at a tool and die company need to code jobs properly and notify the billing department when orders ship. Make sure your workers understand their roles in realizing revenue. And give them adequate training and tools to get the job done efficiently.
Creating an office manual is a good starting point. It should cover every aspect of your billing and collections process, set standards for key activities and provide complete, updated customer contact information. Consider establishing collections-based performance goals for certain employees, such as salespeople and customer service reps. Then you can reward employees who achieve those goals with bonuses or other incentives.
5. Use collection agencies as a last resort
A customer sent to a collection agency is likely lost forever and unlikely to serve as a positive referral source. Plus, third-party fees may consume much of the collected amount. Send customers to collections only if these consequences are acceptable, which may be the case in some circumstances. For example, if you have chronic problems with a customer paying invoices, you may be better off collecting what you can now through an agency and not having to deal with the customer in the future.
Come up with a set of “must send” criteria that soundly and objectively drive your decision. Also, remember that you may be able to write off an uncollectible outstanding debt on your tax return if it’s properly documented.
Back to basics
By this point, many companies have trimmed their operations and workforces to the extent possible. So, instead of looking to boost cash flow by cutting more costs, go back to where cash flow begins — your customers. Tightening your collections practices not only helps reduce cash flow shortages and bad debt write-offs, but also can free up cash for your company to pursue growth opportunities and build long-term value. Contact Hood & Strong to brainstorm cost-effective strategies that are right for your business.
