Where does your struggle with cash flow come from? If you’re like many growing SMB companies, it stems from the gap between the time your product/service is delivered and when you actually get paid as opposed to a failure in sales or product development. It’s an accounts receivable management problem. Below are 7 of the most commonly made accounts receivable management mistakes and what you can do to correct them for faster invoice collection.
EXTENDING CREDIT TO EVERY CUSTOMER
While offering net terms has many benefits, they are not right for everyone customer. It is important to do your due diligence to ensure you are taking a measured risk in extending credit on a customer-by-customer basis. As well as extending credit terms tailored to each company you work with, not every company is the same so all credit terms shouldn’t be the same either.
SKIPPING THE CREDIT APPLICATION
A credit application gives you access to all of the information you need to decide if credit terms are right for a customer and, most importantly, references. Sure, you can purchase a credit report, but numbers are not always the only answer. Talking with others companies they have worked with in the past is the best way to get an idea of what your relationship with this customer might look like.
NOT KEEPING TABS
Just because a customer was financially healthy the first time they bought from you does not mean they will be that way forever. Businesses go through financial ups and downs and cash flow changes constantly. One way to keep tabs on those customers who buy on credit is by consistently pulling credit reports and analyzing them for signs of financial instability like liens, bankruptcies, law suits, etc.
While credit reports are not extremely expensive, you may have a large number of customers you sell to on credit, and consistently buying reports on them can begin to add up. By utilizing accounts receivable management software you can go about this another way; by tracking their payment history and behavior. An A/R management system allows you to report on and analyze customer payment trends and makes you aware of any progressive trends or changes happening you may not have otherwise noticed.
If you notice a customer begins asking for longer terms, is paying slower than usual, or becoming more difficult to get in touch with about payments, be sure to reconsider selling to them on credit in the future.
LETTING COMMUNICATIONS SLIDE
It is pretty easy for a customer to forget about a payment due date or put your invoice aside because a problem they see with it and forget to call you about it. This is why staying in touch with your customers is paramount to successful collections. When you are calling them to ensure invoice receipt or sending reminders as a due date approaches, the customer cannot forget about your invoice and has every opportunity to bring up the problem with the invoice.
The struggle though, and why many companies have a hard time keeping up with consistent customer communications, is because it takes too much time. Most of the time employees responsible for collections have way too much to do and because communications can be so time consuming, it’s the last thing they get to since it interrupts their workflow.
DENYING CREDIT TO START UP COMPANIES
You never know where this company may go; if everything seems to check out and there are no red flags, consider offering stringent terms and make them more flexible as you build your relationship with the business
NOT PROVIDING ONLINE PAYMENT OPTIONS
Giving your customers an option to review their invoices and pay them online can significantly speed up payments; additionally you can keep your customers payment information more secure than with paper checks, and save yourself money. You’d be amazed at how much faster your customers pay when they do not have to worry about writing a check, stuffing an envelope, looking up your address, writing it on the envelope (hopefully correctly), sticking a stamp on there, and walking it out to the mailbox. With online bill pay options your customers can click a link from their invoice and pay instantly, allowing them to get right back to work.
LETTING CUSTOMERS THINK THEY CAN GET AWAY WITH IT
If your customers are frequently late to pay and nothing happens, why would they worry about getting you the money on time. They likely have other vendors who penalize them for late payment, so they always pay them before you.
Think carefully about whether or not you are going to impose late fees; it may put some customers off. Maybe a better way to incentivize them would be to offer benefits to early paying customers, like a discount.