For many small and midsized companies, collecting cash on a timely basis from customers is one of the greatest challenges they face. It is often a delicate balance between maintaining good customer relationships while letting the customer know that your business success and continuity is dependent upon getting paid in a timely fashion.
Online businesses have an advantage over traditional businesses in that payment is almost always received via credit card, PayPal, or other electronic payment methods before delivery of the goods or services.
Unless your business is one that can become a completely digital business, there are several steps you can take to significantly increase the amount and speed of customer payments while at the same time increasing customer satisfaction. In essence, by embracing newly developed technologies and strategies in customer “order to cash” processes, your business can emulate the payment efficiencies of web-based businesses.
The high cost of a bad system
Companies that bill customers for goods or services when or after the good is delivered or the service performed need to have great follow-up systems for cash collection. Poor cash-collection systems can result in:
- High order-taking error rates. Did the salesperson provide the proper terms and payment agreements in the sales ordering document?
- High order-fulfillment error rates. Did the production and fulfillment people get the order right?
- High DSO (Days Sales Outstanding) rates. Is the customer using you as a “bank,” delaying payment so they can pay their other vendors first?
- High cost of dispute resolutions. Do you know to effectively play the good cop/bad cop role when it comes to collecting cash from a customer?
- Inefficient/ineffective collection processes. How much are you writing off on receivables that could be collected with a little creativity, or a call to the client from senior management rather than your billing department?
The result of a poor billing and collection system is long-term losses due to customers patronizing better managed companies for their products or services. If the customer thinks that your process for billing and collection is poor, they will generally have a poor impression about your entire organization.
Addressing slow-paying customers
Let’s assume that your billing and collection systems and processes are just fine but you still have too many slow-paying customers.
Where do you start? Here are some thoughts:
- Start by looking at how to streamline internal processes and make it easier for customers to work with you. Is it easy to do business with your company? Is every contract negotiation a painful event for both parties?
- Know and understand your current and prospective customers and the cash flow traits of their own businesses to help reduce non-payment risk and tailor your collections strategies. For example, if you are a subcontractor working for a general contractor, that general contractor might not get paid until certain milestones are achieved. At the same time, that general contractor has to consider that you have employees to pay every two weeks.
- Communication—both between departments and with your customers—is the key to efficiency and visibility into cash flows. Move from emails to real-time data and information sharing (e.g., using a service such as Dropbox).
Strategies to collect cash
Consider what it’s like doing business with your company from the customer’s perspective. Is your company as efficient at handling their business as it should be? Consider the following:
- Implementing or expanding automation of the Order-to-Cash (O2C) cycle. Quote/ O2C normally refers to the Enterprise Resource Planning (ERP) process in which you take customer sales orders via different sales channels (e.g., email, online, sales staff, fax, or by some other electronic means); fulfill the order, including shipping and logistics; generate an customer invoice; and then collect payment.
- Standardize your procedures for product or service quotation and order management.
- Integrate order entry, credit, billing, and collections.
- Investigate benefits of event management and automated alerts.
- Centralize customer risk information in a single location.
Much of the consumer sector has moved from paper checks to electronic bill pay and this trend will only continue. However, many businesses have been slow to embrace electronic payment processes. Your company should be able to accelerate customer payments by incorporating technology into your vendor-payment and customer-collection processes.
- Event management (triggers and alerts). Are you sending out new customer shipments when you have not been paid for the last shipment? The right system would “trigger” an alert, which would allow you to use the potential shipment as leverage to collect the old receivable.
- Electronic interfaces to banks and customers. If you are not requesting your customer to pay via ACH versus a check, you are likely affecting your cash flow by almost an additional week.
- Web-based and electronic sales order management applications. These are very effective as they can be used to require payment before order fulfillment.
- Credit-management solution. Do you know the creditworthiness of your client? Do you adjust credit terms based on the customer’s history of paying you and others?
- Electronic invoice presentation and payment solution. Are you still sending out paper bills to customers, which adds additional days of delay in getting paid?
There are many other technology-based systems that can be purchased inexpensively that would improve your business processes, accelerate cash collections, and improve customer services:
- Customer Relationship Management (CRM)
- Advanced Planning and Scheduling (APS-APO)
- Sales & Operations Planning (S&OP)
- Procurement (Business Commerce & Cash Management)
- Extended Warehouse Management (ETE execution tools)
Many businesses (and their bankers) find that businesses “grow themselves into the ground.” The faster you grow, the more money a business needs to invest in people and inventory. If you are not collecting money from your customers quickly and efficiently, you will find yourself with a successful business in terms of sales but a very unsuccessful business from a cash-flow perspective.
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