Collections are often the last thing anyone wants to do, however, outstanding balances can seriously impact cash flow and hold your business back. By implementing accounts receivabls strategies and adopting collections best practices for your business, you can improve the likelihood that you will get paid on time or even in advance.
Improve Your Business's Cash Flow With These 5 Collection Strategies
1. Get Paid in Advance (If Possible)
When you start a new project or job knowing you won’t have a negative cash balance, you’re already on the right track.
Getting paid in advance is the way to avoid situations where you need to chase clients that delay payments.
Is it likely your clients will pay in advance? It depends on how much trust they have in you. In some cases, it may help to offer a small discount for advance payment as an incentive. Advanced payment gives you peace of mind by reducing risk of nonpayment.
It allows you to reinvest the money and lets you do better budgeting.
Ask for the largest amount you can get before you start work when they are in love with the idea of working with you - 50% is standard in many industries.
Getting an upfront payment that covers your out of pocket costs will completely change your company's cash flow.
2. Set Up a Retainer
Retainer billing is a no-brainer. It’s good for both you and your clients. A retainer program makes it easier for clients to budget and smooth out their cash flow.
It's Easier Than You Think!
Look at how much your biggest clients pay you on an annual basis. Divide that by 12 to come up with a monthly amount. Give them a proposal that lists the services they typically use over the course of a year. Include a scope document that defines what they get for that monthly fee and what’s out of scope and covered by a pre-approved work order.
Once you decide on the retainer amount, take it further:
- Set up recurring billing to automatically send out invoices
- Send invoices between five and ten days before the end of each month
- Put in your agreement that you will automatically ACH their bank account (on the first of the month if you can), or
- For an extra fee, charge their credit card for this monthly amount.
This enables both parties to map cash inflows and outflows more easily. It helps you reduce your billing and collections costs, and it helps them reduce their accounting costs
QB Tip: Additionally, if you set up your QuickBooks® to download transactions from your bank, you can set the default general ledger account code for repeat transactions. By doing this, you can also automate the accounting of those retainer billings, which in turn reduces the accounting costs on the back end.
3. Assign a Collections Owner
A bad collections process will lead to unnecessary cash flow problems.
Don’t assign collections to a receptionist or office manager unless you’ve made it clear where it fits on the priority list and given them sufficient time to do it right.
Collections are often the last thing anyone wants to do, so oftentimes it rarely gets done well.
It’s really hard for a receptionist to make collection calls if he or she also has to answer the phone.This is a cash flow mistake a lot of businesses make simply because the person making the call doesn’t want to do it, hasn’t been trained in conducting effective collections calls; and isn't given sufficient time for this time consuming, stressful task. As a result, collections becomes a low-priority job.
One option is to have the sales person be accountable for the collection process. If they get paid when the company gets paid, you’ll give someone incentive to make sure you get your money.
4. Automate Collections
If you use QuickBooks® Online you can integrate the Funding Gates™ app, a receivable management system, to automate your collection process. GrowthForce uses Funding Gates to set up automatic collections reminders according to our collection policy.
And when someone is late, it will automatically send a series of progressively strident emails and make phone calls to get your money. Start at the largest balances that will impact your cash flow forecast the most.
Finally, when all that fails, Funding Gates will send a weekly email to the key managers telling who is late this week and which accounts you should watch. It shows how many customers were called or sent reminders, so you get an early warning if your collection efforts are faltering.
When cash is tight, most businesses separate their bills into a “must pay” or “like to pay” pile. If you’re a company that’s calling after a bill is one day late, or if your proposal has a serious late payment penalty, your bill will end up on the top of the “must pay” pile because it tells the client you’re serious about collections.
By implementing these best practices, you’ll change the collections dynamic.
Do you want your client to pay you on time? Show them you are serious about getting paid on time...
- Send an Email Reminder 5 Days Before
- Make a Phone Call the Day Before
QB Tip: With QuickBooks® Online you can review a list of all open invoices and send a batch reminder to all customers who haven’t paid.
5. Call Clients 5 Days Before Bills are Due
An Ounce of Prevention
Most people wait until the invoice is 30 days past due to make the first call. That’s a big mistake.
Your first call to a client should occur between three and five days before the invoice is due.
Frame it as a client service call to check on the client's level of satisfaction while also checking to ensure that the invoice was received and understood. And get a commitment as to when you can expect payment.
Be ready to respond to any client service issues. People will tell you what’s wrong with your service delivery model when you are trying to separate them from their cash.
Waiting to get that check in the mail is no longer an excuse QuickBooks 2014 + and QuickBooks Online offer the ability to make a deposit just from having the details of a check. All you need is the bank account, check routing number, and check number to enter the check into QuickBooks and make a deposit.
QuickBooks has the ability to email invoices in real time and allow customers to view invoices and attachments (such as expense receipts) online through a portal. Give the person making the calls access to the screens needed to send another copy of the bill.
Make sure you have a good process to communicate any disputes. If you show your clients you're serious about resolving their issues, you'll show you are serious about being paid.
Have an escalation process.
You need to have an escalation process to decide when you should shut down services.
Remind the client that once you go to collections they're responsible for any attorney fees they incur, so you both have an incentive to avoid that step.
However, if you're concerned a company's going under, make sure you file a claim fast so you are first in line.
If you can be ready with a response and anticipate any objections your clients may have, then you will improve your cash flow.
By implementing and adopting good collections strategies and best practices, you will definitely see improvements in your cash flow.
Collections, however, is only a fraction of what you need to be focused on to improve cash flow. If you are ready to learn more, we encourage you to read our latest ebook - The CEO’s Guide to Improving Cash Flow - 28 Ways to Gain Efficiency and Peace of Mind Using Cash Flow Best Practices...