If you are an executive at a small or mid-sized business, chances are you are in the process of putting together a budget for 2024, or have already done so. As part of that budget, you have likely made some accommodation for your accounts receivable (AR), probably in the form of a Days Sales Outstanding (DSO) objective based on past performance. Maybe you have factored in an incremental improvement in DSO, but how much thought have you given to how you are going to meet that budgeted goal? Also, are you leaving money on the table by not being aggressive enough with your goal?
If you don’t have a credit and collections professional on your staff who understands the contribution an efficient order-to-cash process can provide for your business — and that may be because your business isn’t at the point where that level of expertise is affordable or deemed necessary — it is unlikely you have the bandwidth to give AR management the attention it deserves. Hopefully, that is why you are reading Your Virtual Credit Manager. We can help you focus on the AR issues that matter the most.
With that in mind, here are four complementary and reasonably aggressive goals that will generate a very positive impact with regard to your cash conversion cycle over the next twelve months:
Eliminate half of all 90 day plus past due balances
Strive for 100% Invoice Accuracy
Implement an Electronic Invoice and Payment Presentment (EIPP) Platform
Reduce DSO 15 percent
To put this in perspective, a company with $10 million in sales with a DSO of 50 days, upon achieving all these goals including the DSO reduction of 15 percent, will have converted an additional $200,0000 of receivables into cash.
Continue reading to learn what it will take to achieve these goals…
How to Eliminate Half of Your Over 90 Days Past Due Balances
Non-performing receivables are a drain on your business. If they are the result of a payment deduction (partial payment), an issue requiring an administrative solution, not handling the matter inflates your AR. If, however, there are unpaid invoices that have been allowed to go beyond the 90 day mark, you have a serious collection problem.
Anytime there is a payment deduction or a partial balance is left on an invoice, it should be a matter of policy to resolve the underlying issue within 30 days. In most cases (90 percent or more), we find the customer has a valid claim and deserves a credit. If the customer’s claim is not valid, it is much easier to research the matter when it occurs rather than 90 days later. Fresh memories and recent documentation facilitate the resolution process. Moreover, keeping this type of clutter off your AR helps you focus on real collection issues.
With old unpaid balances, you need to adopt aggressive collection tactics. If the customer has not been contacted consistently or recently, calling them needs to be made a priority. When the customer has been called several times and has still not demonstrated any effort to pay, it is time to make one final call and then escalate the matter. Also, make sure you are speaking with a person who has the authority to issue payment, not just an AP clerk.
The first step in the escalation process is a final demand letter sent via certified mail, with a return receipt requested, or by a courier service such as Fedex or UPS that can get you a signed receipt. That signed receipt is an important document should you have to go to court and proves you provided the debtor with notice. The final demand letter is a straightforward request for payment of the entire itemized balance due within ten to fifteen days and a statement to the effect that if payment is not received within this time frame the matter will be turned over to a collection agency or attorney. Should this grace period pass without payment being received, the account should then be sent to a collection agent.
If your AR has a sizable balance over 90 days past due, you should make it a top priority to make your final calls, send the final demand letters, and if necessary refer the account to a third party collection agent. By doing this, you can then concentrate on more recent past due receivables in order to prevent them from aging more than 60 days past due. A large number of receivables in the over 90 aging bucket is a sure sign your collection efforts have been insufficient.
Please feel free to share this newsletter with your small business customers . . . it just might help them pay you sooner!
How to Significantly Boost Invoice Accuracy
The payment deductions discussed in the previous section are most often the result of billing errors. Often these are repetitive errors caused by system weaknesses. By identifying the root causes of these errors and then fixing the system weaknesses you can dramatically reduce the number of deductions being made by more often sending accurate invoices. For more about dealing with deductions, check out this article.
Another way to increase invoice accuracy is to pay careful attention to the customer’s purchase order (PO). Many times, customers will place orders over the phone and then follow-up with a PO, which may contain differences with your standard terms and pricing. When there is mismatch between the PO an your terms and pricing, the customer is more likely to delay payment and take a deduction. This is because their accounts payable staff (or software) must realize a three way match (invoice, PO, and receiving documents) before payment can be approved. Therefore, your order documents, and subsequently invoice, need to match the customers PO. Fixing any problems before sending out the invoice is more efficient and eliminates payment delays and shortages.
Lastly, don’t allow salespeople to provide customers off-schedule pricing without prior written authorization. Off-schedule pricing that is not documented in the customer’s file is a sure way to create invoice errors, and one of the most common causes of pricing discrepancies between the customer’s PO and your invoice.
Why You Should Implement an EIPP Platform
It is obvious, even to casual observers, that commerce is increasingly digital, and the business-to-business (B2B) world is following the paths blazed by consumer commerce. Electronic payments are now used more than checks for B2B transactions, and AP automation is driving the conversion to electronic invoicing processes.
If you want to get paid faster, you better be giving your customers an e-invoice. By the same token, offering your customers digital payment options such as credit card and Automated Clearing House (ACH) payments makes it easier for them to do business with you. EIPP capabilities facilitate both these activities, but also offer you much more. Besides providing invoice presentment, most EIPP platforms will also provide automated dunning notices so you can easily follow up on late payments (you will still need to make calls to some laggards) as well as provide cash flow insights in regard to scheduled payments.
The good news is that implementing EIPP capabilities does not have to be an expensive proposition. Popular accounting software solutions such as Quickbooks now provide EIPP capabilities, as do many electronic payment providers. EIPP is simply a natural fit that provides an attractive return on investment.
The experts at Your Virtual Credit Manager are ready to help you improve cash flow and reduce AR risks during these challenging times. We can help with completing tasks, improving processes, and selecting technology. What do you need help doing? We are currently offering 33% off our standard SMB consulting rates.
More Tips for Reducing DSO by 15 Percent
Achieving all the above objectives is going to significantly reduce your DSO. But, the goal is to reduce DSO by at least 15 percent, so here are a few more actions you can take to ensure that:
Focus your attention and collection calls on the customers with the largest past due balances and those who are most at risk of paying slow. By staying on top of these accounts you get the biggest returns for your efforts and prevent large sums going over 60 days past due.
Because you are focusing your attention on larger balances, you need to take a no-nonsense approach with customers that make small purchases. If you extend them credit, you should not tolerate them paying more than 15-30 days slow. If they cannot pay you regularly in a timely fashion, require them to purchase using a credit card or other payment at time of the sale. With many credit card issuers now offering buy now pay later (BNPL) options, smaller customers can still enjoy the cash flow benefits of credit terms. Remember, the idea here is to spend less attention on this class of customers and still get paid faster.
Another way to maintain your focus on critical customers while spending less time and effort on the non-critical accounts is to work with an AR outsourcing partner. Most third party collection agencies now offer first party outsourcing. Besides freeing up your time, the outsourcing will be handled smartly by collections experts.
Implementing a collection software solution provi. es benefits beyond what most EIPP solutions offer. Collection software provides workflow, document management, and communication tools that dramatically increase collection efficiency and can return a 10 to 15 percent reduction in DSO without doing anything else. Also, there are now a number of collection software solutions specifically geared to small businesses that are both economical and require little to no IT involvement
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Three Rules for Successful AR Management
If you adopt these goals and reduce your over 90 balances by 50 percent, improve invoice accuracy, implement EIPP and take other steps to reduce DSO, you will generate cash that can be re-invested in the business, accelerate cash-flow and reduce your cash conversion cycle. That’s a pretty good trifecta.
The good news is, none of this requires rocket science. As you evaluate your situation and determine how best to achieve your goals, common sense and an understanding of the trade receivables lifecycle will help you get the job done when you keep in mind these three rules:
Be proactive rather than reactive — a laissez-faire approach to AR management and collection is a sure path to under-performance
Work smart — collections is a numbers gain, so make sure you prioritize your efforts
Take advantage of automation, technology, and external expertise (outsourcing) — even if it requires new ways of doing things don’t hesitate to try out new tools that are productivity multipliers
It’s up to you to get the job done, and making the commitment to take control of your AR is the first step on the way to reaping dividends.