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There are three key drivers of growth in a business- product, sales, and cash collection; however, the third one rarely receives the attention it deserves. Businesses often focus on sales/marketing and product – while taking cash collection as a given. The success of many B2B companies depends on their ability to manage the receivables collection function efficiently. And this is a function that deserves more attention, investment, and, dare we say, credit than it usually gets.
When you sell a product or perform service on credit, you are also in the B2B accounts receivables collection business. The financial health of your company depends on how well your business can collect on sales. Unfortunately, it is often performed with inadequate forethought to the systems, staff, strategy, and tactics to deliver exceptional results. And businesses find that their customers are using them as a bank, with many overdue invoices impacting the cash flow and growth prospects of the company.
Here we will look at how it is possible to increase your company’s cash flow performance with better planning, execution, and technology
Credit, or rather the lack of credit-risk strategies, can often lead to bad B2B business debts. The problems can intensify with the lack of efficient operating models and insufficient management focus.
Many businesses do not implement a robust framework for credit-risk assessment. They do not follow the global best practices that reduce customer delinquency and debt collection. Not accounting for credit risk can lead to unhealthy business growth. It expands the customer base but depresses the profitability.
Companies with a credit risk framework often do not monitor pre-delinquency or follow the same approach for each bad debt. These companies seem to follow the same settlement strategies for all delinquents instead of adopting a customized approach for each such customer.
Most companies do not have a specialized debt collection team, and they mostly rely on external agencies for the same. Some outsource this job to call-center agents who lack proper training to assess a customer’s situation. These agents, thus, fail to provide the right settlement options to these customers.
When the responsibility for collections lies between multiple departments, it is difficult to establish clear ownership of credit risk. Often, such companies lack staff that specializes in credit and risk management.
Top executives seem to be more occupied by transformation, innovation, and digitization that accounts receivables & collection is usually not in the spotlight. Bad debt figures don’t often feature on the agenda, making it harder to improve the situation.
Bad debts are never good for a business. They affect company finances as well as the accounting process. Bad debts often complicate the accounting process making it difficult to comprehend when a sale was completed. Accounting for an unpaid sale requires a variety of collection and reporting procedures.
Preventing bad debts is essential not just for the company’s financial health but also to minimize reputation and relationship risks from the collection process.
Debt management is vital to a business as it ensures that the company has enough working capital to reinvest and grow. Effectively managing debt requires some thought and planning and can be controlled with these simple steps.
Most businesses have an informal arrangement for supplying goods and services. Not having clear, written terms of trade can lead to several disputes creating bad debts.
B2B companies require a firm credit policy to ensure their continued growth. Before offering credit to new customers, companies should conduct a thorough credit history and business reference check. Document the terms of business and the credit limits, and initiate business only when your customers understand, accept, and sign the business terms.
Implementing new payment terms and conditions is better done with new customers or those looking to extend their credit limit. Introducing new terms to existing customers could upset them and affect their loyalty.
Customers are more likely to pay you on time when you provide them with the right information on documents and invoices. Disputes can create bad debts that can significantly impact the business.
All your documents- quotations, invoices, contracts, purchase orders, and estimates should refer to your terms and credit policy. Make sure that the invoices and financial statements clearly show the amount due and the due date. The company’s billing address and bank account details should also be present on such documents.
It is a good idea to check with the customer if they need any additional information to expedite the payment. Indicating collection charges for overdue accounts on your invoices and statements can discourage late payments.
Well-maintained information is the key to good debt management. There are many credit management software solutions available in the market that can ease your company’s debt management process. These software solutions can closely monitor your debtors’ ledger and keep track of the outstanding payments. These solutions also offer regular reporting to help identify trends and patterns before they can impact your business’ cash flow.
One of the simplest hacks for getting paid outstanding invoices paid quickly is to add a multitude of payment options (credit card, bank transfer, cheques) – from a ‘Pay Now’ button on your invoice to enabling debt financing solutions – where you customers can get the outstanding invoices financed and pay you while they manage the repayments. The simple philosophy is to provide no excuses for your customers to not pay you – something which we adopt here at ezyCollect as well.
Accounts Receivables automation modernizes the accounts receivables process through automatic, electronic systems that decrease repetitive and time-consuming tasks. It frees up time for your accounts receivables team to chase payment and get the cash in to mitigate bad debts, rather than wasting time on printing and posting invoices.
AR automation improves the accuracy of invoicing details, leaving little to no room for an excuse for late payments. The AR team gets more time to chase payments and handle exceptions making collections fast with less delinquency.
Strengthen your delivery systems and implement the practice of keeping signed dockets as proof of delivery. When you automate the AR process, it becomes possible to send invoices ahead of time, discouraging customers from making late payments. It can also send automatic reminders when customers deviate from your trade terms.
Review the credit limits of your customers regularly. Look out for warning signals which could indicate that they may be facing financial problems. Check on all customers, even the long-standing ones, to monitor changes in buying habits or an increasing level of debt.
Wherever possible, refrain from doing business only with one substantial customer. Customer concentration risks outweigh the benefits. Be careful of customers who are expanding rapidly as their business growth can sometimes affect their ability to pay. Do exercise caution when handling requests for extending credit.
Stop supplying to customers who do not pay their accounts on time. Initiate a discussion about the situation and try and reach a settlement for payment of past supplies.
The core of a sound onboarding practice is to ensure that potential clients can pay for your goods or services. Implementing complete business credit checks allows you to access a client’s payment history, giving you useful information about their ability to pay, now and in the future. When you know a client’s potential payment pattern, you can make an informed decision if and how you would like to conduct business with that customer. The existing process of getting trade references and having your customers and sales teams fill out forms isn’t the most effective one – you might consider investing in a service or resource that can complete comprehensive business credit checks for you rapidly and help you transact with the right customers for your business
When you have insight into how a potential client manages financial responsibilities, you can make amendments to your payment terms and credit limits. Customizing payment terms for different customers helps safeguard your business from unreliable clients and cuts down the risk of bad debts. For instance, if a credit check indicates that a potential customer is a payment risk, you may front-load the payment terms or not offer credit at all.
Credit checks can be invaluable to mitigating risks and protecting your business from potentially expensive mistakes.
B2B businesses face several challenges when collecting outstanding payments from delinquent customers. Developing a well-structured process, leveraging digitization, and upgrading your teams’ resources and capabilities can maximize recoveries and prevent bad debts. With an increased focus on debt management, companies can reduce high costs and lost income and enhance customer focus, customer engagement, resilience, and profits.
January is the perfect time to finally get on top of the challenges of managing your debtors. If your customers are paying you late, and your cash flow is suffering because of it, it’s time to face your bad debt reality. The good news? You can reverse bad debt with decisive action.
You might need a debt detox if your business is suffering from any of the following symptoms:
Keeping track of who owes you money and then getting them to pay up can seem overwhelming. Where do you even begin? The typical downtime in January is a great opportunity to start to fix your debtor management problem with a deep cleanse. Here are 10 steps you can start today:
This might sound trite, but often, a business will allocate its cash flow problems to sales, inventory, pricing, competitors, the economy (or anything else) before it admits the real issue lies in credit control. However, reducing total overdue debt and speeding up your average collection time will inject much-needed operating capital into the business. Increasing sales is great, but until you get paid, nothing improves.
Map your accounts receivable so you get a clear picture of the percentage of invoices that are overdue, by how long, and how much is owing to your business. Your accountant can do this for you, or ezyCollect can do this in seconds. You should be able to quickly pinpoint your largest and longest overdue accounts. That’s your starting point.
While you may think of this as an endpoint in debt collection, if your overdue accounts are overwhelming you, start by sending your largest and longest overdue debts to a debt collection agency. Let the experts deal efficiently with the debts that will give you the largest returns when a collection is made. (In ezyCollect, referral of debts to a debt collector is done with the click of a button.)
There’s lots of measurable data you can mine from your balance sheet and profit and loss statement alone. Ask your accountant to do some modelling on basic data like your Days Sales Outstanding and Accounts Receivable Turnover Ratio. What’s the impact on cash flow if these improve? Set some measurable goals and share these with your team. For example, a goal may be to halve the number of overdue accounts within 40 days. (Read how Feral Brewing achieved this goal.)
Chasing a payment is almost impossible if you don’t know how to contact your debtors or who to speak with (your sales team may have the most current information). Your accounting software should be your source of truth. Start with your oldest debtors (the longer a debt ages, the chance of making a collection reduces). While you’re updating your customer contact records, note the last known action taken to chase payment (e.g. phone call to Managing Director with promise to pay mid-February). By updating your database, you keep the whole team on the same page when it comes to customer communications.
Your credit policy may no longer reflect the needs of your business or how you want to allocate credit to customers and manage debtors. Do you now want to accept credit card payments, or offer payment plans or incentives for early payment? Update your policy to make sure it achieves the aims of
(1) getting paid promptly and
(2) maintaining a great relationship with your customers.
Use the opportunity of the New Year to genuinely reach out to your customers and wish them success in the upcoming year. Let them know of any updates to your credit policy and any follow-up action they should expect in the coming weeks e.g. ‘Sam from accounts will be in touch to discuss your payments plan.’ Emails like this serve as reminders and often prompt action. (Sending a bulk email to selected customers is a simple process in ezyCollect.)
Every credit customer should have a personalised communication plan that is triggered on Day 1 of an invoice being overdue. Now that you have updated your customer contact details, choose the channels you will use for reminders (e.g. email, SMS, phone) and document the escalating plan of action. What communication will your customer receive on Day 1, Da y 6, Day 10?
Your reminders are going out as per your communications plan—now make it easy for debtors to pay you. If your customer can’t easily transact with you online, expect more delays. ezyCollect users can install a payment gateway quickly using one of our preferred partners.
You’ve put the time and effort in to clean up your overdue debts, now don’t let them get out of control again! Risk management strategies such as getting credit reports before offering trade terms to new customers, and monitoring your customers’ credit activities are long-term investments in protecting your cash flow – and peace of mind.
Refreshing your accounts receivable with a debt detox is a great start to the New Year, and puts you back in the driver’s seat of credit control.
Only ezyCollect gives you an end-to-end solution to revolutionise team efficiency and customer experience from invoice-to-payment.