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.