12 ways to collect receivables quickerJan 11, 2024
The beginning of the year is a great time to improve your processes, and one area I see a ton of small businesses fail is in collecting money for the work they've done.
Today we'll address 12 ways you can improve your collections for good.
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12 WAYS TO COLLECT RECEIVABLES QUICKER
When looking at a business for the first time, one of the first things I look at is cash flow. And within cash flow, there are a number of levers that can be pulled to improve it.
One of those is collecting cash from customers. I can tell a lot about a business based on how good they are collecting their receivables.
First, it tells me how good their processes are.
Second, it tells me how quickly they’re able to grow. If you’re slow to collection, it’s unlikely you’re optimizing for growth.
Third, it tells me how optimized their profits are. If you’re collecting slowly, it’s costing you money.
So, how do we become cash collection machines?
Today we’re going to talk about all the ways businesses can get money more quickly, which will ultimately reduce your stress and allow you to grow more quickly.
Have a contract
You want to make sure you’re working for reputable businesses and simple documentation can do a great job of weeding out those who aren’t serious about business.
Ask for references, get a W-9, and please have a contract.
Written terms assure you’re both on the same page and gives you the ability to blame “the bad guy” (the contract) when you reach out.
If you’re resistant to contracts, you need some sort of documentation showing:
- what you agree to
- how you’ll get paid
- what terms you’ll be paid on
You’d be shocked at how many businesses don’t have these simple systems.
Bill quickly & accurately
This sounds obvious, but it’s amazing how many businesses don’t bill in a timely fashion.
By billing slowly you’re making it more likely the person involved with the project has forgotten details and needs to review records. That means they set it aside for later and may not ever come back to it.
I’ve seen businesses that bill immediately (meaning within minutes of completion) and it’s amazing how many times people will approve and pay the invoice right then.
Every day you wait to bill after the work is complete:
- is one more day without the cash
- increases the likelihood of a slow response from the customer
- erodes trust in future billing
- creates a communication drag
A customer hesitating to approve a bill significantly increases the likelihood of late payment.
Having systems to review or validate your invoices before they go out can be a game-changer in building trust with your customers.
These two may seem at odds, which is why I addressed them together. You have to balance quickness and accuracy, which can be hard to do. The best systems I’ve seen for this include the person doing the work as the initial “submitter” and accounting as a “reviewer” and “sender.”
With the right systems, the person on the job “submits” they’ve completed it, then accounting reviews for accuracy and contract adherence, then sends it out.
By assigning an accounting person to this, you can assure these get handled quickly, which speeds the process along.
Get creative with payment terms
There are a million ways to collect money, but most just do what they started with on day one.
Your situation will dictate what makes sense for you, so below I go over 4 things you can do to get payments faster.
Early pay discounts
Receivables cost you money, time, and stress.
If you have debt, like a line of credit, outstanding money is costing you in interest and utilization of the line of credit.
Offering a discount that is slightly less than your cost of capital will reward customers who pay early with lower prices and also allow you to reduce utilization of debt, which saves you money.
I’m a little hesitant to offer blanket early pay discounts, but they can be the right solution in many situations.
Collect money in advance
When selling time or holding products, that “used” resource is unable to be sold elsewhere.
To account for this cost, take full or partial payment to reserve that good or service, which helps both sides. Agreement to do work or sell a product restricts the business from selling that time/product elsewhere and deposits help the customer know they’re prioritized.
This works well in consulting, as an agreement to do work restricts you from accepting other work. By taking the payment, you’re offering them a certainty of the work being done.
Make payment easy
A lot of businesses still don’t take credit cards and it’s slowing down your payment cycle.
By accepting many different types of payment, you’re increasing the likelihood you get paid faster.
Every business operates differently, which means that the right payment type could be different for different customers.
An interesting thing I’ve noticed is that many large public companies have archaic approval systems that make working with a nightmare. But… they often allow reasonably large charges to be made to credit cards, which can bypass some of the other red tape.
Speaking with your contact and getting a deep understanding of their process will not only get you paid faster, but it’ll help you understand the true cost of doing business with that customer.
Implement late fees
Late fees can be the difference between a business holding payment or sending it.
Many businesses have rules against incurring late fees, so slow payers will still often pay on time to avoid them.
You can choose one of two types of late fees: punitive or cost of capital
Punitive fees are intended to act as a motivating factor for customers to pay, but could hurt your relationship with the customer.
Cost of capital fees are just enough to recoup the cost of financing their late payment.
Even if the business doesn’t pay quicker because of a late fee, it assures you’re recouping some cost associated with their slow payment.
Create a collection procedure
To many businesses have no process for collecting money and wonder why they aren’t getting paid.
If you only review your AR Aging once a month (or less), you will always struggle with getting paid.
Awareness is the first step, which means you need a system to track your outstanding invoices and reach out.
I encourage everyone to create a system where they:
- Review outstanding invoices weekly
- Establish step-by-step processes for contacting customers at 7, 14, 21 past due
- Create “escalation” steps at 30, 60, and 90 days past due
The business will determine what the right course of action is, but an example is below:
At 7 days past due, send an email to the customer’s accounting.
At 14 days past due, notify the project manager and email customer’s accounting again.
At 21 days past due, ask the project manager to reach out to their contact.
At 30 days past due, notify internal managers and attempt to escalate with the customer.
At 90 days, send a legal notice.
Late payment could be a signal of cash flow issues, changes in staff, or changes in policy. It’s important you act quickly because it can significantly increase your likelihood of getting paid.
Automate the process
There are so many cool tools and software out there that can make the process of collecting money easier, so we should use them.
Automation also feels less personal, which means you can be more “pushy” and create additional contact points. Yes, they’ll be annoyed by these automated emails. But the only way to stop them is to pay, right?
Automation also reduces the likelihood of human error in the process, which means your processes will be followed to the letter of the law 100% of the time.
But, don’t go to only automation. Still keep a human touch in the process, as those individualized messages hit differently.
Payment plans may seem counter to getting paid quickly, but it requires a key element: commitment.
A payment plan will typically collect a payment method and put it on the schedule, which increases the likelihood of payback.
Also, if they don’t end up paying 100%, they likely paid something (because you got a deposit right?). Some money is always better than no money, which is what you would have gotten if you waited to the end of the product/service delivery.
Creating a billing schedule not only provides cash flow, but it allows you to collect from your customers sooner.
Instead of waiting to the end of an engagement, create milestones or scheduled billing periods.
If you bill weekly, they get the bill soon after the work is complete, which helps with familiarity, as we discussed above.
Consider what works best for your business and look for ways to increase frequency and lower the likelihood of getting zero.
Some customers just aren’t worth the business they bring. Chronic lateness is often a sign of bigger problems, so by getting in front of it and “firing them” you could be avoiding more issues later on.
Your business is ultimately for you, and those that increase your stress levels because of a lack of trust aren’t worth the hassle.
Firing bad customers allows you to serve your good customers better, which will ultimately make you more money.
Ultimately you’re protecting your margin and stress levels.
A final note
The only way to know if these strategies are working is to track the numbers.
- AR Average Balance
- AR Average Days to pay
AR Average Balance
This is the average balance over a specific period.
Track your balance on a schedule that goes with your business rhythms:
- After invoicing
Run your AR Aging Report on a consistent schedule to determine how the balance is fluctuating and pay attention to the trends in the Over 60 and Over 90 buckets.
Record the reasons for each in those buckets to keep track of trends.
AR Average Days to Pay
If a customer typically pays in 20 days but it hitting 40, you know something has changed. Many systems will provide you an average days to pay for your customers and utilizing this as you review your receivables can help you be more proactive.
On a company level, understanding AR turnover and average days can give you a high-level snapshot too.
AR Turnover Ratio tracks the number of times you go through your receivables in a year.
A higher ratio means you’re receiving money more quickly.
See the formula below.
Average Days to Pay on a company level is calculated by dividing 365 by the turnover ratio.
A “good” ADTP will change based on many factors, but always watch your trends.
A final final note
Managing your cash flow is one of the most important jobs in a business.
If you need to make changes, and nothing is urgent or breaking, try and make one change at a time.
This will allow you to track what makes material changes and pull that lever even harder.