How serious are the problems of late payments and defaults for small and mid-size businesses (SMBs)? Over 60 percent of all net-30 invoices owed to SMBs are paid late, according to a recent study.
Cash flow problems due to poor working capital management issues like these are debilitating at best for small and mid-sized companies. According to a U.S. Bank study, roughly 82 percent of small businesses actually fail due to the inefficient financial management. While larger organizations may be better equipped to absorb financial loss, non-payments can erode profit margins, ruin growth plans, and even shutter a small business.
Many businesses try to evaluate and track the creditworthiness of their customers, but that is usually a difficult and time consuming process. Solving this challenge is critical. Small and mid-sized companies need to make certain that their accounting and billing process management practices are optimized and highly efficient. Here are 10 ways to help strengthen the process:
1. Perform careful due diligence before signing contracts with customers
It’s important to learn as much as possible about the company you’re going to do business with and to start the research process as soon as you begin communicating. Use various information sources, not just credit bureaus. Also try the local chamber of commerce, bank and trade references, and the company’s annual 10-K report. Even existing customers should undergo periodic reviews.
2. Clearly document all terms and conditions
State in writing all delivery and payment conditions, and discuss any provisions in the agreement. This is where you can indicate whether certain conditions apply, and that you do not accept any other conditions. To start, check with your trade association for the conditions typically used in your industry. Before entering into the contract, ask a lawyer to review the conditions.
3. Make sure customers sign receipts
Verify that the person who signs each receipt for your products or services has the proper authority. Also ask for a company stamp on each receipt.
4. Send invoices quickly after delivery
All key data should appear on your invoice so that it doesn’t hold up payment. The basics include:
Your company name, address and telephone number, along with a contact name
Your customer’s proper company name and address, and the right contact person
The nature and quantity of the goods or services
The price in the appropriate currency
The agreed-upon payment period
Your terms on the back of the invoice
Supporting purchase orders, if applicable
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.
6. Create a payment reminder process.
If a customer does not pay on time, call and follow up with a written reminder that you are expecting payment within a reasonable time, such as one week. If the customer still doesn’t pay, send them a warning and, eventually, a formal written notice. This typically asks for payment within two business days and presents a specific date by which the money must be received before legal proceedings start.
7. Use written late-payment agreements
It’s reasonable to expect that some customers may simply need extra time to pay. For them, create a written late-payment schedule. You should also monitor the customer’s progress to make certain they comply with the agreement and are not on the verge of bankruptcy. Also inform your credit rating agency because late payments by your customer may have implications on your own creditworthiness. Make sure to note all terms of the agreement, as well as:
The total amount due
The payment periods
The specific dates when payments must be received
Your bank account number and other routing information if payments will be wired/transferred electronically
Supporting documentation, including purchase orders, if applicable
8. Document and communicate your process to your company
Communicate your credit management process to other departments. This ensures tasks and responsibilities of staff in other departments are clear to everyone; they may be able to play key roles collecting invoice payments. Also hold staff accountable, and periodically evaluate how well your accounting and billing management process meets the needs of the organization.
9. Periodically review customer’s new financial information
Most companies review a customer once and then assume nothing changes. Be sure to review each customer with a frequency that aligns with the perceived risk they present and their potential for default. Be careful to avoid any biases caused by personal relationships. Just because you have a good relationship with a customer doesn’t mean they won’t default.
10. Set ambitious actions and goals
It’s easy to underestimate the value of effective credit management. But done well, it helps mitigate unnecessary risk, creates opportunities for improvement, and frees working capital for business investment. So set actions and goals, measure your performance, and apply changes when necessary. A few examples of objectives include:
Identify the average days sales outstanding (DSO) in your industry (average number of days invoices go unpaid).
Lower your DSO within a given period. Your industry average will help you determine a sensible benchmark.
Reduce the number of bad debts
Compare your results with those of industry
Maintain a healthy diversification of buyer portfolio
As you put these practices into action, remember that accounting and billing process management is not a one-off project. It’s a continuous process. With success, you can accelerate invoice payments and dramatically improve cash flow to help optimize your organization’s working capital. However, even the most prudent strategy can’t eliminate all risk. Tools like credit insurance can provide a deeper level of information about the health of your buyers and can protect you in case of an unexpected loss.
If you are a business owner or CEO within the San Francisco Bay Area or Silicon Valley, in need of an experienced part-time CFO to help your company improve cash flow, accounting and billing process management, as well as profit margins, our highly skilled outsourced CFO services provide direct access to high-quality expertise in a cost-effective manner.
CFO Growth Advisors (CGA) specializes in unique and highly effective growth strategies that are tailored to help companies grow more quickly and efficiently while improving sales & profit growth. Contact us to learn more.