Maintaining incoming cash flows

The key to ongoing success in business, particularly for SMEs, lies with the prompt collection of outstanding accounts. Yet too often many small business owners let this key area of business fall by the wayside. This can be due to a reluctance to chase client payments or collecting on accounts only once they are overdue. The debt collection process can be a long and arduous one and while almost all companies will at one time or another need to undertake it, prevention is always better than cure.

As Sue Hirst, founder of CAD partners noted when talking to a number of small business owners, the most common mistake amongst SMEs was a laissez faire approach to accounts receivable. She noted in one case, overdue accounts were only followed up after a business ran out of money. This is compounded by the tendency to believe achieving sales is the same as achieving profit.

However, by implementing a number of invoicing strategies at the beginning of a business relationship, it greatly increases your chances of collecting on time and, ultimately, boosts your cash flow.

They include:

Providing numerous payment options

This is a fairly straightforward way to ensure timely collection, based on the idea that customers will have different preferred methods for paying invoices. If a customer prefers to pay by cheque but only BPAY or cash options are presented this reduces the likelihood of an invoice being paid by the due date, as the customer is then forced to explore an unfamiliar or inconvenient option. Wherever possible, provide clients with as many payment methods as feasible, including credit card, cash, online banking, PayPal and cheque. However, the number of options will be void without a concise, well-presented invoice sent with clearly outlined terms of credit.

Segmented billing

For certain types of businesses this may be a good way of securing partial funds before work has started. In particular the method of billing the same customer more frequently, for instance fortnightly rather than monthly, or charging an upfront fee, then a partial fee mid way through completion can establish a nice precedent for collection regularity. Billing in increments also secures a steady flow of cash for your business and ensuring your business isn't the one failing to pay on time.

Keeping tabs on accounts receivable

Once a business is well underway and accounts begin to pile up, the benefits of a well-organised, and even regimented accounts receivable process becomes evident. Quite often this process is best implemented only once an accounting history has been established. To begin it can be helpful to examine past collection schedules for your clients and plan accordingly. This is done on a case-by-case basis and enables you to identify the types of problems that are occurring. Delayed customer payments may be the result of outside influences, such as seasonal changes in demand, or simply due to a business requiring a little more prompting.

At the outset ensure all invoicing follows a set timeline, including stages for follow up and system alerts on overdue accounts. Alert employees to the importance of accounts receivable and familiarise them with these procedures. Set time aside each week to address unpaid invoices and bill clients immediately upon the completion of service or delivery of goods. Prompt and consistent attention from you is usually responded to in kind.

Alternative arrangements

As noted earlier, certain customers may simply be unable to pay on time, every time but are nonetheless loyal and worth retaining. In such cases it can be beneficial to provide a flexible collection approach, while establishing early that collection schedules must still be adhered to. Setting varying credit limits for certain customers and cutting a line of credit completely until some payment is made can prove motivating. However be careful not to alienate loyal customers who on occasion require late payment, rather, work out a schedule to suit them. Alternatively, offering a cash discount for before-time collection is an option, if early remuneration is worth the loss in revenue.

Assessing customer credit

Evaluating a customer's credit rating before a business relationship has been entered into is perhaps the best way to pre-empt late collection. Avoiding those customers with poor credit ratings will reduce the likelihood they will repeat this credit history when it comes time to pay your account. The cost of reports relating to potential customers is offset by protracted costs associated with chasing unpaid debt. Credit reporting services such as those provided by D&B can provide a thoroughly researched background into individual or company credit history. This includes credit defaults, bankruptcy, judgement and summons data and other past credit outcomes for informed decision making. Dun & Bradstreet's Guide to Cash Flow and Credit Risk outlines the importance of being fully informed about a customer's credit history, a making use of the services on offer. Exploring your options when it comes to preventative measures can help you react faster when presented with collection defaults. This includes steps for implementing a credit policy, how to use a credit reporting agency, intelligent use of business data and, if need be, how and when to call in debt collectors.

Click here to learn more about Dun & Bradstreet's Guide to Cash Flow and Credit Risk >>


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