Money owing from customers in the form of accounts receivable is one of the biggest contributors to your company’s cash flow. While business success hinges on having positive cash flow activity - where there’s more money coming in than there is going out - the money that flows into your business can’t really be counted as income until it becomes cash-in-hand.
Every accounts receivable entry in your company records is essentially a short-term loan that’s been issued to a customer. Keeping your overdue accounts under control means getting paid for these loans in a timely fashion, but many business owners don’t fully appreciate the crucial role that the collection of these outstanding debts plays in their success. The fact is that more than 80% of small businesses fail because of a lack of effective cash flow management.
Why is cash flow so important? Aside from the obvious need to pay employees and purchase supplies, establishing a positive cash flow is the only way your business can earn a profit. No company can continue to operate if it consistently pays out more than it takes in, and it’s the ability to generate and use cash that allows your business to:
- Stay on top of its debts
- Enjoy regular growth
- Maintain flexibility in the face of financial emergencies and expansion opportunities
- Get approved for new credit
- Attract additional customers with better credit terms
Every business has its share of accounts receivable, and the bigger a company gets the more outstanding accounts it will tend to have. It might not be the most enjoyable part of running your small business, but learning how to manage these accounts effectively can mean the difference between heading a company that profits from long-term success, and one that simply closes its doors and disappears.
The Importance of Checking a Client’s History
Many collection headaches can be avoided entirely if your business takes the time to investigate each potential new customer before extending the privilege of a credit account. Three of the most important aspects of evaluating and approving a client for credit include:
- running a credit check, and obtaining a credit report
- requesting and checking bank and commercial references
- obtaining a signed agreement with respect to the credit and payment terms being offered
Credit checks may not be free, but at about $30 per report, they’re a bargain when compared with the costs of not being able to collect on a delinquent account. Meanwhile, reaching out to a potential client’s past and current trade partners is a great way to uncover revealing information about their payment history. Does the customer make a habit of paying their invoices on time, or are they a reluctant payer that consistently requires follow-up?
Don’t fall into the trap of thinking that any new client is worth the risk of overlooking the occasional red flag. The cost of dealing with a customer who doesn’t pay can often be higher than the cost of forgoing that client’s business in the first place.
Five Tips for Collection Success
Lack of integrity aside, there are any number of reasons why a customer might fail to pay their invoices on time:
- smaller companies may be short-staffed and disorganized in their approach to paperwork
- bigger companies may have trouble streamlining their large volume of administrative duties
- companies of all sizes may experience negative cash flow due to a lack of proper budgeting or an inefficiency in collecting their own accounts receivable
Effectively dealing with your company’s accounts receivable demands an objective mindset and an understanding of when, and how, to gradually elevate your collection efforts. Staying current with your invoicing, monitoring the status of your outstanding accounts at least weekly, and knowing when to enlist outside help are just some of the habits that will help to keep your company’s cash flow moving smoothly.
Here are five valuable tips for ramping up the success of your accounts receivable collections:
- Design and enforce a plan for following up on overdue accounts at regular, pre-established intervals – for example, when invoices are 7 days past due, 15 days past due, 30 days past due, and 45 days past due.
- Issue an initial reminder letter or email, followed by a phone call – for best results, your follow-up schedule should take advantage of a variety of communication channels, beginning with email, then moving on to telephone and certified letter mail.
- Offset a failure to collect with alternative payment options – when a valuable client has fallen on temporary hard times, consider offering to take installment payments for an outstanding balance, or to accept a reduced amount as payment in full.
- Mail out a certified payment demand letter – an official letter from your company’s lawyer threatening legal action will often be enough to encourage a consistently negligent client to prioritize the payment of your invoices. But don’t be afraid to hire a collection agency if all else fails – recovering partial payment for a bill is better than receiving no payment at all.
- Be persistent, but know when to quit – successful accounts receivable management requires dedication and a willingness to be persistent. Just the same, there may eventually come a point when investing additional time and resources into collecting from a delinquent client is no longer worth the cost.