An accounts receivable (AR) account represents the money your customers owe your business. AR collection systems aim to get as much money into your business as possible to aid in other purposes like hiring more employees or buying new equipment.
This guide will help you understand the importance of an efficient cash collection process and tips for setting one up in your business.
What Is the Cash Collection Cycle?
The cash collection cycle is the process of collecting payments from customers. The receivable collections cycle begins when a customer purchases on credit and ends when the payment is received. Accounts receivable collections involve sending invoices to customers, following up on past-due invoices, and recording arrears.
The AR collections system is critical for the financial health of any business. By collecting payments from customers in a timely and efficient manner, you can avoid late fees, interest charges, and bad debt write-offs.
Strategies To Improve Your Cash Collection Process
No business can survive without cash, so it’s vital to have an efficient accounts receivable collections process in place. Here are eight tips to help you collect receivables quickly and efficiently
Map Your Current Process
Your accounts receivable collections process should have an intuitive design that lets you efficiently and effectively collect payments from your customers. To do this, you’ll need to map out your current process and ensure that each step is as streamlined as possible.
Keeping tabs on your cash collection will help improve your accounts receivable collections process. You can create an online spreadsheet with details about all invoices from a specific customer.
Use an accounting software package to track incoming and outgoing payments automatically. You will know exactly how much money you must spend and what percentage gets collected versus lost to bad debtors.
Outline Clear Billing Procedures
The first step is to outline clear billing procedures. Define each stage of the billing process when you expect to receive payments and what fallback plan you have if you haven’t received payment.
It is essential to have a standard payment timeline with the correct steps to follow when sending invoices to your customers. By creating this timeline, you will know precisely when to send invoices and when payment is due.
Include the date of service and the bill amount in this process. Without this information, you could be sending invoices before customers have had the opportunity to pay you.
Create Better Invoices
Create better invoices and strategically group customers into different categories to improve your creditworthiness. Create clearly labeled invoices and offer all the information you want them to know. List the following info:
- Customer’s name
- Address and contact
- Date of purchase
- Product(s) or service(s) sold
- The total amount owed
- Preferred payment method
Include product images or references to your website so the customer feels more confident about purchasing from you.
Get Paid in Advance
Improve your AR collections by requiring that your customers pay you in advance. Clients can make advance payments by setting up a payment plan and requiring a deposit or a retainer.
A retainer is a payment made before providing any services or products. It is typically used in the legal industry to cover costs associated with future assistance. The payee will usually refund the fee if the customer cancels their contract before receiving the products.
When clients do not follow through with the settlement, the agreement should include consequences, such as charging interest on late fees.
Getting paid earlier will also help improve your cash flow. It will help ensure that you always have money coming in and reduce the chances of getting stiffed.
You won’t need to worry about waiting for customers to mail checks or drop off payments. A cash flow meter will help ensure enough money in the bank to cover your business expenses and pay bills on time.
Systemize Invoicing and Payment Reminders
When you start your accounts receivable management, you first need an accurate and organized system. Applying new technology to your AR collection process can help you automate the system from sales invoicing, payment reminders, and bank reconciliation to purchase orders and payments.
Use a Cloud-based Billing Service
Cloud-based billing services, such as Freshbooks or Zoho Books, make it easy to identify which customers owe you money. The software generates reports regularly or at any time you choose. You can also access these reports on any computer or mobile device to track your progress as you travel around.
A cloud-based billing service helps you save time by automating many of the tasks associated with invoicing and collections. It can also help you become more efficient by providing real-time data and analytics.
Set up Automations
A solid cash collection process requires automation. Without it, you will be struggling to keep up with the amount of money owed to you by your customers. Automate your cash collection process using an electronic funds transfer system.
An electronic funds transfer system transfers money from the AR account to your business checking account once your customers have paid you. This system can help speed up the payment process and ensure that your business never forgets to collect payments.
Integrate Your Software and Services
Your cash collection software should work with your accounting software and web store. Use a unified system that allows you to track payments and manage outstanding invoices quickly. Your billing software should automatically generate overdue notices with instructions on how to pay at their next visit.
If you’re using a software program to track your accounts receivable, your customers should also use it. They can pay online using the same system you use, so there’s no confusion about what payment method they should use.
Set Reminders and Safeguards
The most important part of setting up an efficient AR collection system is the invoicing and payment reminders. Managing these within your system will constantly remind your customers that they need to pay.
Set reminders and safeguards to make sure you follow up with customers regularly. Use a computer-based accounting package to ensure your staff is following up consistently.
Schedule emails to be sent regularly or set the reminder function in your accounting software so that people receive a notification when a customer is late paying or has already paid.
Use the Right Metrics
To determine whether your customers are paying on time, you need metrics that act as key performance indicators in the payment process.
The accounts receivable (A/R) turnover ratio measures how quickly your customers pay their invoices. A high A/R turnover ratio means customers make invoice payments in time, which is good for your business.
The average days to pay metric measures how long your customers take to pay their invoices. This number must stay as low as possible by ensuring clients repay debts within a few days.
You may have policies requiring some or all of your accounts to pay on credit terms. If so, the percentage of sales collected on credit terms measures how much they pay compared to what they owe.
Take a Personal Approach To Overdue Payments
Track which customers pay late and how often they’re late by putting this information into a spreadsheet or database. Research your customers to find out why they’re failing to pay in advance so that you can work with them in the future.
There may be a legitimate reason if your customers are late paying you. For example, if you have a regular customer who’s always paid on time but then doesn’t pay for an order until the due date comes around, you may have made a mistake in how you billed the customer.
To avoid this problem and give yourself more time to collect due payments, follow up with the customer and ensure they understand how to pay in the future. Schedule follow-up calls with clients regularly until they clear outstanding debt.
Get Help
If you still can’t collect the money clients owe your business, you may want to consider hiring a collections agency. Seek an outside collections agent or company when you’re short on funds or you’re having trouble working with your customers for payments.
An outsourcing firm will automate your collection process and allow you to focus on other things like expansion and marketing. You can have a third-party firm manage everything from billing to collecting payments or use an outsourced credit collection service.
Professionals who can help you in this area will deal with the issues quickly and efficiently, so there’s less work for you. That way, you can concentrate on spending time marketing your service and products rather than chasing down overdue payments.
Several companies specialize in helping businesses collect outstanding debt. A collection agency will help you automate your collection process and improve your overall business efficiency.
Final Thoughts
With these steps, you’ll be able to prevent late payments and ensure clients make payments in time. By tracking how much money each customer owes you and using the right software and systems, you’ll be in a much better position to get paid on time without stress.