7 Strategies to Boost Collections and Strengthen Cash Flow

It’s been said that cash flow is the lifeblood of any business. Well, perhaps the best way to get and keep those dollars pumping through your company’s veins is to strengthen the collections procedures you use as part of your accounts receivable process.

Prompt collection of receivables is important in any economic environment, but it’s especially critical during periods of uncertainty or volatility. Unfortunately, many business owners assume slow incoming payments are inevitable, and they do little to continuously improve collections over time. Here are seven strategies to consider:

1. Negotiate and enforce favorable payment terms. In many industries, customers expect net 30-day payment terms from suppliers — but this is often just a starting point for negotiations. You could try informing new customers that you require payment in 15 or 20 days and see what they say. If they accept this term, it could substantially reduce collections time and, thereby, significantly strengthen cash flow.

While negotiating payment terms is one thing, enforcing them is another. Every day that customers are late in remitting payment is essentially a day of interest-free money for them. If you haven’t done so already, consider charging interest on late payments to incentivize customers to pay on time.

2. Create an accounts receivable aging report. These reports categorize receivables according to payment status. For example, you can classify receivables as:

  • 0 to 30 days,
  • 30 to 60 days, and
  • Past 60 days.

Now you can see — at a glance — which customers are late payers, how late they are and how much money they owe. Based on this, you can focus collections efforts on where they’ll have the biggest cash-flow impact.

3. Send out clear and accurate invoices. Vague, confusing or inaccurate invoices often lead to payment delays. Some customers set aside bills like this and eventually, when they get around to it, contact your accounting department to sort things out. Other customers just wait around for you to call them, which could be weeks after the invoice was due. Don’t give anyone an excuse not to pay your invoices on time. If necessary, invest the time and resources into redesigning invoices so they’re easy to read and next to impossible to dispute.

4. Put a member of your accounting staff in charge of collections. If possible, make collections the ultimate responsibility of a specific employee — not just your accounting or finance department in general. Doing so will establish someone who can say “the buck stops here” and prevent neglect and procrastination. Set clear performance goals for this employee, who’s often called a collections manager, such as collecting 90% of receivables by the due date and the remainder no later than 30 days past the due date.

5. Act more quickly on past-due receivables. Studies have shown that collecting past-due receivables gets harder the longer they go uncollected. So, ensure your staff isn’t waiting around too long to address them. Ideally, someone should call or email a customer on the very first day a payment is late to inquire about the invoice. Prompt, professional reminders tend to drive more timely payments and prevent delinquent accounts.

6. Offer payment plans. Many customers want to pay their invoices on time but simply can’t because of their own cash-flow challenges. If you encounter this situation often enough, you may want to start offering payment plans that allow customers to pay off a balance over time. The idea is that receiving some money is better than none at all.

Structure payment plans carefully and put the details in writing, such as how much money will be paid over how many months and at what interest rate (if any). Both parties should sign the agreement. In some cases, you may want to make future shipments “cash on delivery” until the balance on a payment plan is paid in full and you’re confident the customer is on solid financial ground.

7. Call in a pro. If none of the previous six strategies work, your last resort might be to call in the cavalry and engage a collection agency. This is a serious action that you shouldn’t take lightly because it could jeopardize your future relationship with the customer. Also bear in mind that the agency will keep a percentage of the amount collected as its fee. Weigh these potential drawbacks against continuing to work with the customer or perhaps ending the relationship and writing off the bad debt on your tax return.As inflation continues to weigh on everyone’s mind, today’s businesses simply cannot ignore the importance of ensuring all receivables due are collected in full and on time. Discuss the strategies above with your leadership team. And for further ideas and help analyzing your financial processes, contact your CPA.