3 Ways to Speed Up Cash Collections

When I talk to small business owners, managing cash flow is always one of their top challenges. And it’s not surprising since cash flow issues are one of the top reasons that businesses go out of business.

Cash flow is the net cash flowing into your business. It’s what allows you to pay your bills, including payroll. Cash flow management is about managing that flow. And there are a lot of levers and techniques you can use to help improve your cash.

One way to do that is to speed up the rate at which you bring cash into your business. In this post, I’m sharing 3 techniques you can use to help speed up your cash collections.

1. Streamline your invoicing process

You can’t collect what you haven’t invoiced, so make sure your invoicing occurs on a defined schedule. I’m always suprised by how many clients invoice when they can fit it into their schedule or when they are in a cash crunch. That’s a recipe for cash flow quandaries. You need to train your customer to know when to expect invoices and a predictable schedule is key.

If you bill monthly, consider moving to weekly or biweekly billing. The sooner your invoice is in the process, the sooner you can get paid. If a client pays invoices just twice a month, if you invoice weekly, you will get paid sooner than if you bill monthly.

Also, make sure you have processes in place to ensure all the details on the invoice are accurate, including terms, amounts, descriptions, billing address and contact. If your client finds errors in your invoices upon receipt, this can substantially delay payment or eve require you to invoice again.

Upon signing a new customer or client, consider having a call with their a/p department to make sure you are clear on any unique invoicing requirements they have (especially common with larger companies that leverage procurement systems). Any special customer needs should be clearly documented in SOP’s to avoid payment delays.

2. Expedite Client Payments

Consider offering a discount for early payment. For example, if your standard terms are net 30 days (payment is due in 30 days), consider offering a 2% discount if paid in 7 days. You can also consider adding late fees or other penalties for late payments. For example, some companies will only offer live support if a client’s account is current, reverting them to email support only if the account is not current.

Offering electronic or online payments is another way to expedite payment and avoid the “check is in the mail” response from customers. ACH payments can be processed for a small fee and even the fees for credit card payments may be outweighed by getting the payment earlier.

Some companies will also require deposits or upfront payments. These payments can help fund out of pockets costs such as labor or materials that are incurred to deliver the product or service and also reduce your credit risk.

3. Establish an A/R and Collections Process

One mistake I see many clients make is that they just trust that payment will be received and don’t have a process in place until they are in a cash crunch. Just as with invoicing, good process helps improve cash flow.

Ensure that payments are being applied to client accounts in a timely manner and that any differences between the amount sent and the amount invoiced is reviewed and resolved. If a client was invoiced $10,000 and paid you $9,500, you need to understand the reason for the $500 shortfall. This might require a credit to the account or you need to make arrangement for payment with the client. Either way, unreconciled differences need to be resolved in a timely manner.

Establish an automated reminder (“dunning” process in accounting speak) that sends a series of email or written reminders to customers when an invoice becomes past due up until it’s paid. You can also send out periodic client statements of all open invoices.

Establish an escalation process for proactive collections. This typically has stages that starts with a call from a support staff, to escalation to someone at a higher level (including the owner), to an in person to visit and might end with a process for suspending work or service if payment still hasn’t been made.

Did you find this helpful? Then I invite you to grab my guide “10 Ways to Improve Your Cash Flow.”