If cash in the lifeblood of an organization, then the accounts receivable department is like the heart – they keep that lifeblood flowing. Without effective accounts receivable solutions, you can throttle your cash flow and ultimately harm the continued success of your organization. An effective accounts receivable department, working in conjunction with a renowned collection agency, is the healthiest heart your business can hope for.
Even if you don’t have a dedicated department looking after accounts receivable, there are still effective strategies you can implement. But if the entirety of your contingency plan hinges on sending a couple of sternly worded emails in case of late payment, then you might be in trouble. To ensure timely and complete payment on all the debts owed to you, you need to be proactive, preventative, accommodating, incentivizing and diplomatic.
Here at Summit A*R, we want you to receive every single cent owed to you. While that might finish with our commercial debt collection specialists it starts with your effective accounts receivable strategies. To help you implement a successful accounts receivable plan, here are seven concrete strategies.
Start with Smart KPIs
To be able to keep tabs on the performance of your accounts receivable, as well as adjust any facets that need adjusting, you need to start with smart Key Performance Indicators (or KPIs, for short). KPIs allow you to measure the performance of an organization, department or activity according to key criteria. For instance, a school might measure its performance by test scores, college acceptance rates or student satisfaction – those would be its KPIs.
An accounts receivable department’s KPIs need to be tethered to its real-world issues. How many bills and invoices do you have out there that are past-due? What is the average time of turnaround for payment from a client/customer? This is what is referred to as DSO, or Days Sales Outstanding, and it is one of the most frequently measured KPIs in accounts receivable. Others include the Accounts Receivable Turnover Ratio (ART) and Average Days Delinquent (ADD).
Strengthen Your Credit Approval Process
For businesses that lend, it pays (quite literally) to have hard and fast policies for issuing and evaluating credit. Take a look at the borrower’s cash flow statements, debt structure, balance sheet and any other applicable information you feel you need to establish confidence.
It bears mentioning, however, that every industry is different, and so you should create this accounts receivable strategy collaboratively with your sales department. In other words, you want to make sure that you reflect the market realities of your particular industry when you create your policies.
Streamline Your Invoicing
The way you invoice can have a profound effect on the success of your accounts receivable. Rather than have a human (prone to human error) send physical invoices, it is better to automate the process and use electronic billing systems. This way you reduce the risk of errors and cut down on the time it takes for a client to receive – and pay – their invoice.
A streamlined invoicing process also involves clarifying terms upfront with the client, ensuring that you remove any ambiguities from the invoice before they can be exploited.
Make It Easy For Your Debtors
We’ve discussed this before on the blog, but it’s not a bad idea to repeat: if you want a client to pay in a timely fashion, remove any obstacles they might reasonably face. Obstacles can turn into excuses very easily. If you only accept one form of payment, for instance, a client can reasonably put off paying you out of sheer inconvenience.
For more effective accounts receivable, offer different payment option: credit cards, PayPal, direct transfer, checks, cash, etc., etc. Be as open and facilitative as you possibly can, and your clients will have no excuse to be late. Of course, if they are late, immediately call a commercial debt collection agency – don’t wait for the matter to resolve itself.
Incentivize Early Payment
You might take a look at your DSO (your Days Sales Outstanding KPI) and see an issue in need of fixing. The average number of days it takes your company to collect a payment is too high, but how do you lower that number? For one, you can incentivize early payment.
A popular way that accounts receivable departments incentivize early payment is to approve discounts for bills paid before due. For budget-conscious businesses ambivalent about paying on time – either because they don’t fear the repercussions or don’t want to stifle their own cash flow – early payment incentives can be just the right shot in the arm.
Establish an Effective Collections Process
Here’s the part of the blog where we remind you that, in order for your accounts receivable department to be as effective as possible in recovering debts, it needs to partner with a professional, trustworthy commercial collection agency. There is a limit to what you can do, as an accounts receivable department, to prevent late payments. If you think a payee might be late, or eventually delinquent, call in the pros.
Summit A*R has commercial collection agency associations with various organizations, like the Better Business Bureau, the Association for Credit & Collection Professionals and the International Association of Commercial Collectors. In other words, you know that we are accredited, trusted and effective.
Move Fast on Late Payments
Debts become more difficult to recover as time goes by. That’s why it is imperative to act quickly on late payments. You might be hesitant to chase down a late payment using a commercial collection agency, for fear of alienating the client, but Summit A*R operates like a first-party collection agency, expertly and diplomatically acting on your behalf. As soon as a payment is late, call us in to help. There’s no sense – financial or diplomatic – in waiting for a payment that might never come.
In order to maintain a consistent and reliable cash flow, you need to implement effective accounts receivable strategies. We hope these seven strategies will serve your business well in avoiding late payment, but always remember: when accounts receivable solutions fail, we’ve got your back!