Poor accounts receivable management can lead to cash flow problems. Your business might have generated sales, but if you can’t collect them effectively, you’ll always have a shortage of resources. Ineffective accounts receivable collection can delay payments to your own employees and suppliers. This can create a rift that you’ll have a difficult time to overcome. You might lose employees to other companies and suppliers might not trust you as much because of late payments. You’ll need to improve collection rate to maintain a positive cash flow.
How can you improve collection rate?
Automation is the Way to Go
If you want to improve collection rate, you’ll need to invest in automation. Artificial intelligence allows you to simplify administrative tasks and collections. You can automate the scheduling of invoices and reminders when a due date is near or has lapsed. Consider installing a chatbot in your website so that it can reply to simple questions related to payments.
Simplification of Payments
The solution doesn’t always have to be complex, sometimes the simplest approach offers the biggest rewards. Your customers need to have simpler options when it comes to paying your invoices. Simpler payment enables them to either pay on time or early. They can meet your deadlines if they have the option to pay online using their cards or other digital methods. Before you send an invoice, make sure that all the details in it are accurate. This allows you to avoid delays because of wrong information.
Offer Discounts for Early Payments
One way to entice clients to pay early is to offer a reasonable discount. Doing so is a proven strategy that boosts your collection rate and improves your business relationships with clients. This also enables them to save money. You can also offer better payment terms or credit for clients who consistently pay early.
Make Exceptions for Credit Payments
Allow credit payments for qualified clients to improve collection rate. This provides them with an option especially if they don’t have enough cash to settle their balance immediately. However, only offer credit to clients that have a good track record of paying their dues on time or early. This approach enables you to manage accounts receivable effectively.
Follow-Up on Unpaid Invoices
The longer you notify a client about their unpaid invoice it’s unlikely they’ll ever pay it. Monitor overdue invoices and follow them up through various channels. Create a list and take note of how long an invoice is late. Train your accounts receivable team to email, call, or message a client even if they’re only one day overdue. This approach improves your collection rate.
Make Aging Reports
Monitor the payment status of your receivables through an aging report. You can identify the number of days that have lapsed since you sent an invoice to a client. The number of days can range from 0-30 days to over 90 days. The report includes the amount due. This allows your collections team to monitor updates and progress about your clients’ invoices. They can schedule notices when an invoice is almost due, when the due date arrives, and when a client is late. An aging report allows your team to solve collection problems before they get bigger.
Establish a Deposit Amount and Penalties for Late Payments
Consider charging penalty fees and an interest on late payments. If there’s no cost to them, a client will frequently pay past their due date. A fine will incentivise them to pay on time or earlier. Communicate possible penalties that a client might incur so there’s no confusion once they receive a notice. Establish a final deadline and the possible consequences for missing it. To further reduce your risk of nonpayment, you can ask a client for a deposit or partial payment before completing a service or delivering an order.
Payment Plans
Some of your clients might have legitimate cash flow problems that prevent them from paying their dues on time regardless of how many times you notify them. In such cases, you might want to consider offering long-term and loyal clients a payment plan. This provides them with an option to pay their outstanding balance without further constricting their cash flow and scarce resources. Create payment terms and schedules that you and your client find acceptable. Put this agreement into writing and enforce it.
Improve Customer Services
Your communications strategy is crucial to improve collection rate because you’ll have to communicate with clients about your policies, you’ll have to notify them about due dates, and you’ll need to follow-up when invoices are overdue. Train your staff on how to convey your accounts receivable collection policy to clients. This allows them to follow the deadlines you established, know about possible incentives for early payments, and the penalties they might incur when they are overdue. Create templated responses and guidelines your client-facing team can use. They can customise these based on the flow of the conversation with a client. Better service and communications can lead to faster and higher collection rates.
Client Diversification
Consider diversifying your client base to mitigate risks of late or nonpayment of invoices. A new client is detrimental to your company if they are delinquent in their dues. Before accepting new clients, review their credit history and if they pay their business partners on time. Their track record will speak for itself, and you might have to reconsider taking on the risk of accepting them. Communicate your payment and collection policies and terms so that the arrangement is clear from the beginning.
Improve your accounts receivable collection rate when you follow these best practices. Increasing your collection rate enables you to manage your cash flow effectively. You’ll be able to balance your resources and pay your own company’s expenses on time. If you need assistance with keeping your accounting books updated, we at Robookkeeper can assist you. Our first-rate small business accounting services might be what you need. We can process your accounts receivable for you while you do what you do best. Our experienced accountants can take on other accounting-related tasks you might need. Reach out to us so we can customise a package for you.
