Cash flow management is vital in business. Cash flow position is aligned with your account receivable collection. In this post, you will learn 3 powerful ways to improve account receivable collection and building strong account receivable system.
3 Powerful ways to improve account receivable collection:
Choose your clients wisely ( Foundation) :
We as entrepreneur should leave the mentality of attending and accepting all the customers. Not all customers are worthy to do business with. In his book, Book yourself solid, I got the most important advice about choosing right costumers and letting go the costumers who are not suitable for our business.
Many people has mentality of getting everything cheap or free or delaying payment to unnecessary harass us. Think twice before doing business with them. They will steal your valuable time.
If you analyze carefully, you will find that most of the our business is run by 20% of ideal costumers. We should use 80/20 rule and eliminate those 80% costumers who are not contributing in growing our business.
If you have 100 costumers, stop doing business with costumers who are not following your business policy. Believe me, you will not lose money in this way.You can save your valuable time by choosing this method. You can utilize this time in more productive way and get your idle costumers which will give you stress less business.
When you find it very difficult to allocate time to get your collection, you move on to factoring service. Before getting your invoices factored, ask following question:
- Do I need to get all invoices factored?
- When do I need money?
- How much charges am I willing to pay?
How factoring works?
- Factoring service generally pays you 70% to 90% of value of your invoice value within short time. Some factors even provide 100% on value of invoice after charging factoring fee. Fundbox is one of them. It is factoring service specially serving small business.
- It charges 2% to 5% as factoring fees.
- Before accepting invoices, factoring company reviews credit worthiness of your business and your clients/costumers.
- You need to provide details of invoices and costumers to factoring service and they will handle all the stuff related to debtor collection.
Though factoring is expensive, factoring can become tool to fuel your working capital and helps to grow your business and save your time.
Major players in factoring service of 2016:
- American receivable
- Rivera finance
- Universal funding corporation
- Paragon financial group
What should you consider when choosing factoring service:
Industry expertise: Make sure that your factoring service is familiar with your business and have worked for businesses similar to you. It saves your time to explain each term and jargon of your business while getting invoices factored.
Terms and procedures: Read the terms of factoring service carefully. It includes penalty, gurantee required on your personal side, minimum invoices required to get first fund release, procedure to submit the invoices, ineligible invoice criteria ,monthly reports supplied by your factoring service etc.
Customer service: As you are choosing factoring service to save time, it is must that there is timely and fast communication between you and factoring firm. To test it, do not give all the invoices for factoring but get factored minimum invoices and once you receive good customer service from factoring firm, you can anytime supply other invoices.
Reputation of factoring firm: Check reputation of factoring firm in industry, ask them to give you reference of current clients. Factoring firm affiliated with international factoring association requires to follow strict rules, regulations and practices for factoring business. You can check your factoring service status here – IFA website.
Factoring charges: it includes discount rate at invoice value, interest charged by factoring service, legal fees, background check fees, shipping fees, administrative fees for postal charges, phone call charges, penalty etc. Choose factoring service with mid range pricing with high quality service.
Create strong account receivable system:
When you decide to handle account receivable in house, you need strong account receivable system. By answering following three questions, you can build the system.
Hire account receivable manager:
You can do all the things yourself. Collecting payments from customers is not as easy as you think. It means sending reminders, making phone calls, remembering each and everything and still be humble ! There is better way around. Hire account receivable manager or outsource account receivable work. Your account manager can also do that if he has enough time for it.
Make the clear contract:
Sometimes customers do not understand terms of the contracts and due dates for payment. Get prepared easy and clear terms of contract with following details:
- Pricing of service / good
- Delivery terms
- Accountable persons
- Payment due dates
- Refund policy
- Bank account details of company or online service through which you accept payment ( Stripe, payoneer, paypal etc).
- Tax account number
- Other important business terms
There are many apps and software are available for account receivable management. While choosing account receivable software, some essential features you should consider are
- Ability to customize and generate invoices.
- generate pre-written mails,
- Send mail, reminders,
- Dashboard to show paid, overdue and awaiting payment invoices.
- Ageing reports with 30 days old, 31-60 days old, 61 -90 days, more than 90 days old option. There should be option to show percentage of different aged debtors. When you borrow fund from the bank, this report is must.
- Accept payments,
- generate recurring invoices for weekly, bi-weekly, monthly, annually, half monthly.
- Manage and edit pricing.
- Ability to generate monthly account statement of debtor.
Charging interest is one option to get fast collection for payment. However, it affects your business if competitors are not charging interest on late payment. We have better option here. Give reward as % of invoice for prepayment. You can also motivate your costumers to pay within 3 days of invoice by giving 4-5% cash discount.
Do not worry about profit while giving discount. Believe me improved cash position means improved business.
Accept payment online:
Softwares such as xero, quickbook or freshbook give facility to accept payment online via link in invoice.Popular payment services such as paypal, stripe, payoneeer, autorize.net, gocardless can be integrated with cloud based accounting software.
Consider following things while choosing payment gateway:
- Reputation of payment service provider
- Fees per transaction
- Does payment service provider support method your customer use ( Credit card, visa card, debit card, master card)?
- Setup of service
- Support system of payment service provider
Outsource account receivable management:
If you find it difficult to allot time for account receivable management, you can outsource the work from outside. We at Finsprout helps our clients in account receivable management. It covers following activities:
- Making phone calls to customers
- Sending invoices
- Updating customer accounts
- Sending reminders
- Managing factoring entries
- Weekly report regarding status of overdue invoices
- Other customized service as per your requirement.
- Affordable pricing
You can contact us here to get customized quote as per your business requirement.
Use above steps regularly to improve account receivable collection. For bad invoices, You have still the option of using service of collection agency.. The collection agency works very aggressively to collect your payment. This one is last option for you. For any reason, you cant collect payment using all options, write off those amount as bad debt and save your taxes. In this way, you benefit yourself in some numbers.