Most of the business owners we speak with will readily admit that they would like to improve their accounts receivables. In the last 3-4 years, some businesses have had more challenges with their accounts receivables than ever before.
A major key to succeeding in business is to effectively control cash flow. Cash is the lifeblood of every business and unfortunately for many businesses in this economic cycle, the availability of cash remains very tight. Cash management has taken on a completely new urgency.
Accounts receivables, or getting paid on work your company has done or a product it has sold, is one of the most critical elements to positive cash flow. In today’s article, we will cover 3 solutions that should improve your accounts receivables but before doing so let’s consider the cash flow impact of improving your accounts receivables.
If you are a $1 million/year company, every 10 days of accounts receivables equals about $40,000 of usable cash. If your accounts receivables are averaging 75 days out and you improved it to 65 days, you have now added $40,000 in usable cash sooner rather than later. If your accounts receivables improve just 20 days to average 55 days out, you will have added about $80,000 in usable cash. Can you think of something to do with that usable cash? I sure can.
3 Ways to Improve Your Accounts Receivables:
- Invoice - What’s the purpose of an invoice? To let a client or customer know when to pay. Often times, a company will put “Net 30" on their invoices. Now, is that net 30 from when you finished the job or delivered the product, net 30 from when the client receives the invoice, or net 30 from your birthday? We should not assume that they know the answer. The invoice should clearly communicate when to pay. Recommendation: in the largest print on the invoice, put in a box “Payment Due” and then the exact date (month/day/year). Or, instead of having a due date, you could put "Payable Upon Receipt." The invoice should be sent out as soon as possible. Do not procrastinate on this task.
- Billing Statement - Some billing statements will have “0-30 Days, 31-60 Days, 61-90 Days, Over 90 Days”. If I received a statement like this I might think “Oh, I don’t have to pay for at least 90 days because they obviously have other customers doing the same”. Recommendation: leave it out completely.
- Phone Call - Very few people enjoy making a collections phone call. However, there is value in making a phone call to your client/customer that owes you money. Recommendation: improve your accounts receivables, increase sales leads and improve quality control in 1 phone call:
- Hire a young woman or man to make these calls for you. The business owner, executive, or highly paid bookkeeper does not need to be making these calls. You can hire a young person part time for a reasonable wage. Or, if you would rather utilize one of your current employees, that works as well.
- If you want to be paid in 30 days, this call should be made on the 28th day.
- The call should go something like this:
“Hi, this is Beth from ABC Company. We did some work for you and wanted to call and make sure you were happy with that work. (This is the quality control part of the call. Pause and let them answer. If they say “Yes”, say “Excellent!” If they say “No”, ask them what they were unhappy with, tell them you will have the right person contact them about the situation to resolve it and move on with the call.)
We like to stay ahead of our client/customer needs and requirements. Is there anything we should be bidding/estimating/pricing on or anything that you might need from us in the next 30, 60, 90 days? (This may identify a sales or project lead. If they say “Yes”, let them know that you will have the right person, estimator or sales person, reach out to them to discuss further.)
By the way, we have an invoice #______ outstanding here. We wanted to make sure we sent it to the right person for processing. (All you need to do at this point is confirm they have the correct invoice.)
Ok, thank you for your time. Please do not hesitate to call if you need anything else from us. Have a good day!”
We all probably go through our bills the same way. We start with a stack and decide which ones need to be paid now and which ones don’t:
- This one can wait
- This one can wait
- Oh, this is from Beth who calls me, I’ll pay this now. If they know Beth will be calling, they’ll take care of Beth.
Of course, the contact who will receive your phone call may not be the primary contact to ask about quality or upcoming needs but in many cases they’ll be able to answer the questions or put you in touch with the person who could answer the questions. Of course, if your company does work for or sells products to a company with hundreds of employees or to the government, it’s best to just focus the call on the invoice.
While there are other accounts receivables strategies, based on the size and situation of company, this approach may greatly impact your cash flow. An approach that takes less time would be to only call those who have a pattern of not paying on time, 5-7 business days after the payment due date.
However, by making this 1 phone call, we can more proactively politely put our invoice at the top of all of our client’s and customer’s payables list. However, while the primary purpose of the call is for accounts receivables, we may also identify quality control issues and leads to increase sales.
What are you doing to improve your accounts receivables?
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