As the global economy slows, recent studies show evidence of an uptick in business failures (+4.9% in the US over the last twelve months, +4.1% in Canada and also in Europe). A slow invoicing-to-cash cycle and late payments ranked as the top culprits.
This now brings the question of what type of preventive measures companies need to undertake to improve their financial health.
Surprisingly enough, in a more stringent economic environment, businesses tend to concentrate on “core” functions, such as sales, marketing or customer service. In contrast, finance functions are somehow neglected, causing additional strain on companies’ financial health.
In harder times, businesses should focus more on improving their cash flow conversion, making Accounts Receivable a priority. Benefits of an improved receivable process not only include a healthier capital structure, but also a rise in productivity (team efforts focused on viable projects) and more efficient business operations.
But now, how to improve the Accounts Receivable turnover?
 
 

1. Pre-sale – Establish Mutual Understanding about Terms and Conditions

A successful receivable strategy begins with your sales team. The quality of the client relationship will be critical every step of the process. When your team is about to close a sale, it is primordial to establish a common language with your client and set expectations about the main terms and conditions, such as:
– Payment Terms,
– Payment conditions,
– Acceptable payment methods,
– Payment frequency,
– Payment grace period.
The appropriate documentation should be prepared and shared with the client, at suitable stages of the sales process. Quotes, purchase orders, terms & conditions and invoices are the framework of the client relationship, so that every aspect of the transaction is clarified from the start.

 

 

2. Post-sale: Be proactive with your clients and identify your red flags

Once your sale is closed, you want to stay in touch with your client.
Your communication should focus on client satisfaction at this stage. Not about you seeking to get paid. Ask for client feedback. Is he satisfied with the quality of the product or service? Does he need assistance? Have all his expectations been met?
Also, it turns out that many collection incidents happen because of a dispute about service or product quality. Remaining close to your client will give you the ability to be more reactive in the dispute resolution process.
You will also be able to identify the red flag behaviours predicting a payment incident.
As the due date approaches, start reminding your clients about payment options. You also want to make payments easy for them.
Finally, send them reminders 5 days before due date and the day before.

 

 

3. Offer client incentives

There is an ugly truth about optimizing your DSO (or “Day Sales Outstanding”) turnover though. No matter how efficient your receivable process is, you may not get the results you expect. The reason is because your clients have opposite interests. Paying late may be part of their strategy; they also want to keep their own cash flow healthy! Not to mention that most of the time, clients have the upper hand in the relationship. They may also have a flawed payable process (manual process or invoices getting paid once a week only, etc.)
For that reason, offering efficient client incentives is the good (only?) way to get visible impact on your cash flow (set up a bespoke client reward program now).
In some cases, a 1% discount can make a real difference.

 

 

4. After Due Date, Notify, Identify the Problem and Make Decisions

After due date, notify your client of the missed payment. Call their attention to the grace period, late fees and interests incurred. Generally speaking, contact the client at least three times during the first 15 days post-due time, using trackable communication. Use multiple communication channels if need be.
You also need to onboard the whole team (operations, sales team and accounting departments) to identify the source of the problem and make proper decisions. Is the client not paying because of a dispute? Is the person in charge of payments in holidays? Is it the first time it happens?
You will then need to make a reasonable decision about revoking client’s access to your product and services. This step is critical as it could potentially damage the relationship with the client. In the client has a legitimate reason to put a payment on hold, you may not want to strain the relationship even more. Or, on the contrary, you may consider blocking further sales to the client, until the situation is resolved.
Either before or after due date, always keep your books up to date and keep track of the communication flow. It will help you send reminders or nudge your client in a timely manner.
Interesting fact, your collection loses 12% of its value every 30 days an invoice remains past due. So, if you’re getting unsuccessful after multiple attempts, outsource the task of collecting to a trustworthy debt collection agency.
 
 

5. Post-collection, Evaluate your Client Relationship

Post-collection, an evaluation of the situation closes the receivable workflow. Do you want to keep working with this client in the future? You will also draw conclusions improving the quality of the process and policy. There is always something to learn from AR incidents.