Maintaining proper revenue levels is critical to the health of a business. Without enough coming in the door, it can be difficult to stay current with expenses. But sales are only half of the process. Revenue can’t be realized until it has been collected, and slow accounts receivable (AR) collections can have a negative impact on cash flow. It’s critical that businesses speed up collections processes in order to reduce AR to put themselves in a more stable financial situation.
Speed Up Collections Processes By Following These Suggestions
It’s hard to reduce AR rapidly without a plan. Below you’ll find 16 concrete steps you can take to firm up your collections processes and get your AR system working as efficiently as possible.
1. Send Invoices Immediately Upon Project Completion
Businesses frequently set a billing cycle in order to concentrate their invoicing efforts at specific times in the month. This is a time-efficient method, but it can delay collections. If your business invoices at the end of the month, work completed at the beginning will sit unbilled for weeks before going out to the customer.
Instead, consider invoicing projects as soon as they’re finished. This can dramatically shorten the delay between finishing a project and getting paid.
2. Don’t Wait To Collect
The longer invoices are delinquent the less likely they are to be collected. To prevent this you should contact customers with a friendly reminder the very first day their account goes past your collections term. If you invoice Net 30 you should have an AR team member contact them on day 31.
3. Speed Up Collections By Invoicing Electronically
Paper invoices take time to be delivered through the mail. Additional time is then lost while your customer routes the invoice through their intake process.
Electronic invoices are delivered instantly, directly to the proper parties, and are easier to integrate into accounting systems.
Additionally, electronic payment methods can be embedded directly in the invoice, making payment considerably easier. On the whole, electronic invoices can shave considerable time from a customer’s payment process.
4. Systematize Payment Reminders
To reduce AR you need to create a set schedule for reminder letters and phone calls, and then apply that system consistently. You might send a friendly reminder the first day an invoice is late and another at fifteen days delinquent. Sample collection letters are listed here.
If the invoice goes past 30 days you can send a more firmly-worded request for payment and also reach out by phone. These emails and calls should get progressively more serious in tone as the invoice ages.
Setting a regular process assures that you consistently attempt to collect all of your outstanding accounts.
5. Automate Your AR Collections Processes
Manually tracking the payment status for outstanding AR, generating reminders, and remembering to make follow up calls can be very demanding on your AR team’s time. Using software to automate this process can free them to focus on other responsibilities.
Automated invoicing and collections software can help you rapidly create invoices and send them to clients, making it easier to bill upon completion instead of billing in a cycle. The software will also send out reminder emails automatically, and remind your team when phone calls need to be made.
6. Make Sure Your Invoices Are Clear, Thorough, and Easy-To-Understand
Clear, detailed invoices make it easier for your customers to understand what they’re being billed for, which speeds up processing and saves time explaining items.
Some customers have specific requirements for invoices in order to route them efficiently. Get these guidelines ahead of time, and adhere to them. It’s also worth occasionally confirming the contact information you have on file. Sending invoices to an old contact or the wrong building can slow down the payment process.
7. Include Multiple Payment Methods With Your Invoice
Customers have different payment preferences, and sometimes these can change depending on where they are in their own billing cycle. Providing as many payment options as possible, both physical and digital, increases a customer’s ability to make a timely payment.
You can further reduce AR and speed up collections processes by providing ready access to all of your payment options directly inside the invoice. This makes payment extremely easy for your customers, which will help reduce the likelihood that they’ll put it off.
8. Reduce AR By Requiring a Down-payment
It’s good practice for project billings exceeding a certain dollar amount to request a percentage be paid as a deposit before work can begin. This prevents the entire billable amount from possibly becoming delinquent and assures that you’ll make something on the project even if the final bill is never paid.
Deposits have the added benefit of forcing your customers to put skin in the game. They’ll be more present throughout the process because they’ve already made an investment, and this increases the chances that they’ll pay the balance faster upon completion.
9. Practice Periodic Invoicing
For longer projects, get your clients to agree ahead of time to be billed in installments. You can set up invoices to trigger at specific milestones throughout the project. Collecting portions of the total bill at periodic intervals helps your cash flow and makes it easier for your customers to pay.
Spreading smaller payments throughout the life of the project also helps their cash flow, as periodic payments are easier to satisfy than one large invoice at the end of the project.
10. Reward Early Payment and Penalize Delinquency
You can try to incentivize customers to pay early by offer a small discount. In your terms, you might write, “3/10 Net 30”. This means your customers will get a 3% discount if they pay within the first 10 days. This can be very effective for industries with tight margins, where pennies are pinched.
You can also levy a penalty for late payment. You might specify a 2% penalty for payments made after 30 days. This could increase to 5% after 60 days. This can be effective but it isn’t particularly popular with customers. And depending on their situations, the strategy can backfire. If customers aren’t paying because of cash flow issues, progressively increasing what they owe will actually make it less likely that they’ll be able to satisfy their balance. Gauge your customers before using a penalty.
11. Revise Your Payment Terms
You can speed up collections by shrinking your payment window. If you currently bill Net 30, consider reducing this to Net 20, or Net 15. This is still a reasonable payment period and it means responsible clients will pay more rapidly. If you’re uncomfortable making this change for existing customers you can make it your policy for new customers going forward.
12. Set Up a Payment Plan
Just like anyone, your customers may suffer cash flow issues on occasion. If good customers are having a difficult time paying, you can revise their terms to create a tiered payment plan.
You could allow them to pay 30% of their total invoice Net 30, another 30% Net 60, and then their remaining balance Net 90. In a sense, this practice actually slows your collections process, but it helps assure that you collect in full, which is better than not collecting at all.
13. Use Credit Applications to Determine Delinquency Risk
Credit applications let you examine a potential new client’s credit history. If it appears they are chronically poor payers you may opt not to take them on. If you do, you could amend your normal payment terms to account for the increased risk.
You might ask for a larger upfront payment. You may also require full payment before the release of any final deliverables. This can be a good option for existing customers that are chronically delinquent as well.
14. Don’t Be Afraid to Fire Your Customers
A lot of time and resources are wasted chasing payments from repeat offenders. Look at what you make from these customers versus what’s lost seeking payment. You may find that in some cases it doesn’t make sense to continue the relationship. Your productive time might be better-used serving customers that pull their end of the vendor/customer relationship.
15. Prioritize your Calls:
Contact the consumers with higher balances and the newest past due accounts first. This will speed up your collections process.
16. Take Care of Your Customers Privacy
Ensure that you are talking to the right person before disclosing the account information since they are extra sensitive in situations involving a past-due account. When trying to reduce AR, do not hurry up or appear insensitive towards your customer.