As Virgin’s Sir Richard Branson has said, “Never take your eyes off the cash flow because it’s the life blood of business.” In fact, poor cash flow management currently causes 82 percent of U.S. business failures, according to a recent US bank study. This all-to-common struggle mostly affects small and medium-sized businesses (SMBs).

Here are four advise to help you stay on top of your cash flow:

1. Improving the Invoicing Process

The way a business deals with the invoicing process is very often revealing about its cash generation profile. Every little detail has great consequences on the cash balance:

  • When are the invoices being sent?
  • Are they sent via snail mail or electronically?
  • What’s the re-work rate?
  • Is the client’s contact point optimal?

The way the invoicing process is handled matters as much as the tools being used. In other words, you can never go wrong when you switch to e-invoicing and sets up invoicing best practice.

Here are the key benefits. In 2019, both B2B and B2C clients are used to receiving critical data electronically. Given that manual and paper-based processes are inherently inefficient, subject to error and time-consuming, why send paper invoices? Merchants have to print and ship them. Then clients have to process their own mail.

In contrast, e-invoices instantly reach the appropriate recipient and offer key benefits, such as reaching out to multiple contact points and tracking down if invoices have been delivered and opened. Not only switching to e-invoicing cuts processing time by 70 percent and costs by 82 percent (according to an Arden Partners 2018 study), but it also improves Days Sales Outstanding (DSO) dramatically.

Another serious culprit for flawed cash management is the lack of invoicing best practice. Spectacularly enough, 31 percent of Purchase Order (PO) Invoices contain inaccurate information and require manual intervention! The impact on cash flow is enormous as 32 percent of late payments are caused by invoicing errors (according to Tungsten Network). Price or quantity discrepancies or the absence of a valid PO number represent the bulk of invoicing errors. A disciplined process can fix that!

Overall, the choice of an appropriate e-invoicing solution combined with the adoption of invoicing best practices will reduce the risk of errors and it will optimize timing. And the quality of integration within the current ERP software environment (including CRM, accounting, workflow management) is critical to enforce best practice.

2. Being Reactive when Tracking Down Payments and Solving Disputes

Some clients are just late payers and need to be nudged. Having said that, the way dunning management is handled greatly affects the collection outcome. Timing and the quality of message content are the two main predictors of success. Automating client reminders allows perfect timing. But automated reminders need customized content, with relevant customer and invoicing information. So, integration to accurate and real time data (client profile, outstanding invoices, payments and potential disputes) is required to feed client reminders with the appropriate content.

Rules about how and when messages are sent need to be customized as they depend on the type of clients and the nature of client-supplier relationships. Exceptions may be added. If your main client represents 30 percent of your total sales and receives 200 invoices a month from your business, you may want to set different rules over a one-time customer.

Dispute management is another important cash flow issue. Theoretically, most disputes could be resolved quickly, since the majority of them stem from factual errors (price or quantity discrepancies, absence of valid PO number). But in real life, they significantly compromise businesses’ DSO. One reason is that, most of the time, tools dedicated to dispute resolution process (i.e. a messaging feature) are not used. As a result, 36 percent of suppliers’ phone calls relate to invoice errors. An automated, integrated solution can drive the success of efficient dunning management and dispute resolution.

3. Providing more efficient methods of payment to clients

Average collection period, transaction fees, fraud risk and bounce rates are the most important criteria when it comes to selecting payment options. The way your business clients get paid not only affects their profitability but also their cash flow cycle.

Payment options depend on the industry practice and the nature of the customer relationship. In the U.S. and Canada, paper checks are still the standard method of payment in many commercial transactions, including B2B and real estate transactions. In 2017, both large Canadian corporations and SMBs reported paper checks as their most commonly used payment method (57 percent and 70 percent, respectively), according to Canadian Payment Methods and Trends 2018. Yet, paper checks are slow, highly susceptible to fraud and bear “hidden costs” such as additional work and back-office processing. They are also absolutely inadequate for recurring invoicing.

But you have room for improvement. You might ask your clients to switch to electronic funds transfer (EFT or ACH), through incentives, especially for recurring payments.

Here’s a comparison analysis of the methods of payment you can offer to your clients:

4. Incentivizing Clients to Get Paid Early

You can adopt incentive strategies to be paid faster. The incentives you shall offer clients depend on the sector and business model. If you enjoy a 10 percent gross margin, a 2 percent rebate in exchange for early payments won’t be appropriate. Giving away small extra services could be considered instead.

Examples of client incentives shall include:

  • Small additional services
  • Discount for early payments (balance paid before a certain date, or yearly invoice vs. monthly)
  • Greater flexibility (for instance: a down payment required to book a delivery date)

 

All businesses can fix their cash flow management. For this to happen, you need to adopt best practices in the way you invoice, follow-up with clients and offer proper incentives. Also, a proper integrated and automated solution will help you manage the full invoicing-to-cash cycle efficiently. This can be achieved!