In today’s small business economy, late payments are increasingly becoming every business owner’s greatest foe. Small businesses operate on tight budgets, so a few missing payments can really disrupt cash flow and put a business’s continued success at risk.
Some industries are more prone to late payments than others, but across the board, a CashEdge and BAI Small Business study estimates that 50 percent of all small business struggle with their accounts receivables and payment collections; 60 percent of the businesses surveyed wished they could collect payments in a more timely manner.
What can businesses do to collect sooner, collect more successfully, and still collect the full payments due to them (while avoiding fees, or loan and factoring percentage losses)? They can begin practicing the business principle of Receivables Management.
Defining Principal
Receivables management is the diligent tracking and methodical practice of following up on and collecting payments. The effect is simple if a business knows you are closely monitoring your accounts receivables and consistently taking action.
If anything falls behind schedule, they will prioritize paying your invoice, leading to reduced DSO (days sales outstanding). In the event of a seriously delinquent payment, having an established plan for escalating your payment collection efforts will increase the likelihood of successful collections overall.
The foundation of Receivables Management best practices is to accurately track payments due, especially the degree to which they are late (not simply if they are late or not). Different collection strategies should be employed based on the degree of lateness. Most Receivables Management experts agree the categories 1 to 30 days late, 60 to 90 days late, 90 to 120 days late, and 120+ days late are the most effective.
To actively practice Receivables Management, a business must also take organized and methodical action to collect on those payments with emails, letters, and phone calls. Just as important is keeping detailed records of any collection communication history. Citing specific dates and time, as well as having notes on previous conversations, takes away any wiggle room or potential for excuses. Every Receivables Management plan should include an escalation strategy for severely delinquent accounts (more than 75 days late).
How Can Receivables Management Make a Difference?
The longer an invoice remains unpaid, the less likely that you will successfully collect. The challenge of successfully collecting grows even more without communication and interaction early on.
Most small businesses with accounts receivable problems have gotten there simply because they didn’t realize an invoice was past due until payment was over 60 days late. Even more small businesses are entirely unsure of what to say when sending a late payment alert or making a collections call.
Paying an invoice late is fairly common, and most of the time there is no need to stress your business relationship with that vendor. As opposed to sending a client off to a collections agency, simply opening a friendly (but firm) dialog with them, reminding them of the invoice that’s due, need not have any negative effects on your relationship.
It’s important to work out a few different communication options (email templates and call scripts) ahead of time to make the Receivables Management workflow as efficient as possible.
Receivables Management will allow your business to avoid the fees or prevent losses that come from loans, invoice factoring, or collection agencies.
Even among small businesses that send follow-ups to clients once an invoice becomes past due, most do not have any additional escalation plans in place. Having an escalation strategy in place for severely delinquent accounts can make the difference between recovering all or some of a payment, or losing the profits entirely due to nonpayment.
Appropriate firm communication, beyond the first two late payment reminders, can propel a delinquent account to pay up to avoid possible negative consequences (i.e., being reported as a “bad debt loss”). You’ll also be able to see warning signs of a potentially troublesome vendor relationship by noting how frequently over the past year you have to escalate your collections efforts.
The most enduring value of practicing Receivables Management is that your regular vendors will become trained to pay on time with a greater degree of frequency. From your diligence and persistence, they will come to expect an immediate notice from you, should their invoice fall past due. After just a few months, your vendors will start prioritizing your invoices .
Receivables Management can be performed most efficiently by utilizing an app or platform, as the psychological pressure of a third party is proven to make debtors feel more accountable, and more likely to take action sooner.
Routine Receivables Management: Optimizing Your Working Capital
Once you get your delinquent accounts under control, optimize your working capital by sticking with Receivables Management as a routine business function. Receivables Management will allow your business to optimize its working capital, improve its operational efficiency, and allow for accurate future financial planning.
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About Diana Mackie
Diana Mackie is a writer and a believer in The American Dream—small business. Diana helps small businesses stay up to date on the latest news, best practices, and, most important, the top digital tools to increase efficiency and productivity. She also writes for Funding Gates, a company that produces a receivables management software that does just that. Check out the Fund Gates blog for daily advice and tools just for small businesses.
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