It's common for a startup founder to focus on net income because an entrepreneur may assume that net profit is a logical way to gauge the soundness of his company's operations. But an income statement simply relates a company's revenue to its expenses; it doesn't determine the cash a business has available to cover day-to-day operating costs. This is a key differentiator between companies that operate for the long term and those that close their doors after only a year or two.
The improper management of accounts receivable is not an unusual problem. In fact, the Atradisu Payment Practices Barometer survey reports that 23 percent of businesses have invoices that are 90 days past due. Another study by Decision Analyst and Legal Shield reports that 22 percent of the small businesses surveyed deal with debt-collection issues. Even more problematic, says the Atradisu survey, is that businesses lose as much as 53 percent of the value of their receivables if they are not paid within 90 days of their due date. Here are eight steps for ensuring your business is not one of the 22 percent that must deal with debt-collection issues.
1. Expedite the invoicing process
By transmitting bills using email, rather than paper mail, customers receive invoices promptly. By expediting customer receipt of invoices, you also accelerate your company's receipt of payments and evade possible issues such as delayed mail delivery caused by holidays or other issues. If you decide to implement an email invoice delivery process, first confirm your clients' email addresses. Otherwise, they may never receive your electronic invoices.
2. Revise customer payment terms
In most cases, businesses that deliver invoices via paper mail offer terms that grant customers a few extra days before a bill is overdue to compensate for the time required for the invoice to reach the customer and for the customer's payment to reach the business. However, this policy grants customers extended payment terms that allow them to take 30 days or more to pay an invoice, which in turn, increases the time a receivable may remain outstanding.
Instead, if you rely on email to deliver invoices, the invoice reaches the customer practically instantaneously. As a result, you can change your payment terms policy from "net 30 billing" to "payment is due upon receipt." By collecting receivables faster, you may smooth your cash flow. Sending digital invoices with Accounteer is easy. In a few clicks you can create a new invoice, convert it to PDF, or send it directly to your clients from the software.
3. Change your billing cycle
If you send customer invoices as soon as you complete a project rather than using an end-of-month billing cycle to issue them, you collect amounts due faster, which also smooths your cash flow.
4. Maintain positive relationships with customers
Satisfied customers may become long-term customers, which are valuable assets in terms of your company's revenue stream and its timely cash flow. Consider implementing methods that may improve your customer experience, which may ensure customers becomes brand advocates. For instance, your company should conclude its own obligations with customers in an effective and timely manner.
5. Offer multiple payment options
By giving a customer several ways to satisfy his debt, you make it more likely he will pay you promptly. For instance, rather than limiting your payment options to cash or check, you might consider implementing the payment by PayPal, credit card, or electronic funds transfer (ETF) options. Accounteer offers a variety of integrations with payment gateways. It takes less than 5 minutes to register a new account and you can immediately start accepting online payments.
6. Outsource your accounts receivable management processes
It can take a lot of time and effort to manage your accounts receivable. To reduce employee workload and possibly smooth your company's cash flow, you might hire an accountant to process your accounts receivable. Doing so will allow your employees to focus on other critical aspects of your business, such as marketing and sales.
7. Establish conservative credit policies
It's common for a business to offer attractive credit terms to long-term customers, but extending a large amount of credit to even a few customers can negatively affect your accounts receivable outstanding and cash flow. Therefore, before you extend credit to a customer, check the buyer's credit history to ensure he pays bills on time. Also, as you create a customer account, clearly document and explain the terms to your customer before a purchase is made.
8. Hire a collections agency
Some entrepreneurs believe hiring a collection agency to handle overdue accounts will free them to sell additional merchandise, identify more cost-effective financing or better manage their company's supply chain. But the costs of debt collection may be 10 percent or more per account balance, or 35 percent for a "hard-core account." What's more, in the event litigation is required, the fee can increase to about 50 percent. In addition, you're likely to lose a customer in the process. Before electing to use this option, make a final appeal for payment.
A positive and steady cash flow is an essential element of your company's short- and long-term financial performance. The achievement of this goal is dependent on the management of your accounts receivable in ways that maximize and smooth the company's cash flow. Although collection issues are a common complaint of small business owners, these eight steps can help you better manage accounts receivable and avoid the problems resulting from a large number of delinquent accounts.