Cash flow management is perhaps the single most critical element of a small company’s success.
It is well known that customers rarely pay invoices when they are issued and some do not even pay on the due date.
Every day that an account receivable sits in the “past due” category costs the company money and in the extreme those overdue accounts offer no value to the external providers of capital (i.e. – banks, which will not generally provide capital to finance accounts receivable aged more than 90 days from invoice date).
There are a number of ways that any company can achieve better payment performance from its customers. This improved performance will benefit the company in many ways.
CREATE A CREDIT POLICY
It is extremely important to establish a credit account…in terms of size, payment terms and other features…for all clients. Each customer should have a well-documented file showing credit limit, payment terms and additional interest charges for overdue payments. All of the terms should be agreed to in writing by both sides at the outset of the relationship, and the arrangements should be something both sides can live with.
It goes without saying that the quicker work performed can be turned into cash, the better for the company. Invoices indicate to the buyer that the account terms are started. Ensure that all invoices are issued as soon as product is shipped or work competed and delivered.
MEET CUSTOMER REQUIREMENTS
Many customers have automated bill paying processes and invoices that are processed require a specific format. It is up to the supplier to meet these requirements in order to avoid having their invoice rejected, and to be paid on time. Extra work, sure…but if it means collecting cash faster it is well worth that extra work. Ensure you understand all billing requirements up front.
MAINTAIN COMPLETE CUSTOMER FILES
Many invoices get routed to the wrong destination…for a variety of logical reasons. The majority of these reasons are easy to correct through the implementation of a customer contact program, with the end result that invoices do not get lost or delayed.
PROCESS PAYMENTS QUICKLY AND RESOLVE PAYMENT PROBLEMS
Make sure that payments received are posted and credited to the company bank account the day they are received. Don’t get in the habit of making bank deposits on a pre-ordained schedule (i.e. – every Thursday). Also if payment received are not for the full amount owing contact the customer to get an explanation and if you accept the lower payment get a hard date for receipt of the balance.
Also make sure that a process if developed to check the application of payments received on a daily basis…to prevent the error of posting to the wrong account. Eliminating this error solves many potential problems down the road.
RESOLVE DISPUTES QUICKLY
When problems do arise make sure that they do not linger. Contact the customer immediately, determine the cause of the problem and initiate a discussion as to the best way to resolve it
FOLLOW PAST DUE ACCOUNTS CLOSELY – INITIATE COLLECTION ACTIVITY
Initiate a regular review of past due accounts, and contact the customer to make definite payment arrangements. Ensure that you have a fully-detailed internal policy and process for handling past due accounts…making initial phone calls, sending follow-up letters etc., and make sure the policy is followed for all overdue customer.
Finally, so not accept vague promises form the overdue customer, establish a definite payment date and do not be hesitant to get formal collection procedures underway if payment promises are not kept.
REVIEW CREDIT POLICIES REGULARLY
Make sure that company credit policies are reviewed and updated at least annually. Make changes to policy as dictated by prevailing influences and take a hard look at customers you may want to jettison because of ongoing account maintenance difficulties. Also discuss credit limits with certain customers…it may be that additional business can be created with the implementation of a low-risk account limit increase