Adjusting your policies and systems could speed up receivables.
Have you ever thought about how you can get your customers to pay faster? Of course you have! All companies want their customers to pay faster. When a business owner is asked “What keeps you up at night?” collecting accounts receivable is probably at the top of the list.
That is because money sitting in accounts receivable is money that is tied up and inaccessible. It’s money that can’t be used for other expenses, such as marketing, developing new products or expanding your business.
A key metric in managing your accounts receivable is the amount of time it takes to collect payments from your customers. You should be concerned if your average collection period—or Days Sales Outstanding (DSO)—is a third longer than the period established in your credit terms.
For example, let’s assume that Company X has a credit policy of payment being due in 30 days. A third of that time period is an additional 10 days. If Company X’s average collection period is over 40 days (30-day terms plus the additional 10 days), this is a warning sign that collections are lagging.
You can calculate your DSO by dividing outstanding accounts receivable by your average daily credit sales. While there are other ways to calculate the average collection period, this method gives a quick snapshot.
If your DSO is too high, there are several things you can do to get customers to pay faster.
Update Policies and Offer Incentives
To start, examine your credit policy. Extending longer credit terms means you will have to wait longer to collect. If you are currently extending credit terms of net 30, consider reducing the terms to net 15, or due on receipt. Keep in mind that not all customers should have the same credit terms. Credit terms should be set based on factors such as the financial strength of your customers and their reputation in the marketplace.
Offer incentives to customers for paying early. Consider giving a trade discount for prompt payment—such as terms of 2 percent net 10 (a 2 percent discount if the invoice is paid within 10 days). Adding a monthly finance charge for late payment might also encourage customers to pay timely.
Some companies also require prepayments to reduce the amount of credit extended or simply have all customers pay in advance. In some cases, it might make sense to progress bill—seeking payment for the percentage of work that has been completed so far. Rather than waiting until the entire project is complete, billing at 25 percent completion, 50 percent, 75 percent and 100 percent will reduce collection times.
Put Technology to Work
The sooner you get the invoices into the customers’ hands, the sooner they can begin to process your payment. Consider moving to a cloud-based service to improve your billing efficiency so that invoices are generated and sent as fast as possible. Using a cloud-based service such as Bill.com automates online invoicing and collection, and you are paid four to five times faster. With Bill.com, invoices are created and emailed directly to customers, late payment reminders are sent automatically, and payments are received directly into your bank account or by credit card or PayPal, making it easy and convenient for your customers to pay on time. Payments are automatically posted, reconciled and synced with your accounting software.
Be Proactive
Stay on top of your aging report. If a customer generally pays in 10 days and payment hasn’t been received by day 15, make a call to follow up. You shouldn’t be afraid to ask a customer for payment.
Sending customer statements will also help. Generally, statements are sent monthly or anytime a customer has more than one invoice outstanding. Statements allow customers to see all the invoice and payments between two dates. Another advantage of cloud-based services is the access to real-time information and the ease of viewing reports and customer balances—even from your mobile device while out of the office.
Most importantly, remember that actively managing your receivables will have a direct impact on your cash flow!
