As an outsourced CFO and accounting service, we probably should have t-shirts made with the logo, “Cash is king.”
It’s not enough to have strong profit margins, but if your customers are slow in paying, this will have a huge negative effect on cash flow.
A recent article in CFO Magazine quoted a recent study that revealed have half of all invoices owed to small and mid-size businesses (SMBs) are paid late. Ouch. That really hurts cash flow.
Good CFOs work with the internal accounting and bookkeeping team to be proactive in improving the overall Accounts Payable (AP) process from beginning to end. Here are 10 tips offered by the article to help improve the process:
1. “Research your customers before signing contracts.”
Do your due diligence! It’s scary to see how many companies rush into contracts without doing the basic research on a new customer. Offering net-30 payment terms to a customer is essentially a credit risk management issue that good CFOs are focused on.
2. “Clearly document terms and conditions.”
All delivery and payment conditions need to be clearly stated in the contract. Research what is standard in the industry (i.e., Why reinvent the wheel?) is a good place to start.
3. “Make sure customers sign receipts.”
Someone who is duly authorized on the customer side is receiving the physical product or services delivered needs to acknowledge this very important point in the overall process.
4. “Bill quickly after delivery.”
It’s sad to see how often the accounting process is inefficient in getting the invoices out in a timely and accurate manner. This is one of the first areas of improvement that we focus on.
5. “Call customers on or before payment due dates.”
“If you have not received payment, call customers just before or on the invoice due date. Calls can be made by the accounting department or sales, depending on the relationship with each customer. This call confirms the products you delivered and that your invoice has been received. This step also provides good customer service. It helps prevent late payments if your customer is not satisfied with the delivery while there’s still time to rectify the issue. Consider offering your customer a small discount if they pay on time.”
Sage advice.
6. “Create a payment reminder process.”
There needs to be an internal, predefined process of what happens if a customer does not pay on time. This late payment process should include the initial follow up messages that gradually escalate until the payment is received.
7. “Use written late-payment agreements.”
Unfortunately, some customers need more time to pay. In these instances, it’s very important to have a formal late-payment agreement that is signed as a binding agreement which specifies the balanced owed, interest owed, payment schedule, etc.
8. “Document and communicate your process to your company.”
This step is crucial and yet, often, overlooked. Everyone in sales, accounting, and management has a role to play in the overall payment process.
9. “Periodically review new financial information without bias.”
i’s important to maintain an objective view of the potential riskiness of a current customer. Constant monitoring (rather than just once at the beginning of the relationship) is needed.
10. “Set ambitious actions and goals.”
Setting stretch goals are crucial in improving the overall process. One of the most important targets includes reducing DSO (Days Sales Outstanding). Improving this metric is one of the single biggest drivers of improving cash flow.