They say the definition of crazy is doing the same thing over and over again and expecting a different result. Sometimes we get stuck in a rut in our daily work. We’re just trying to keep our heads above water, so we do what we can to make sure we get those daily tasks done. It’s important to take the time every now and again to see if what you’re doing is actually working, or if you could be managing your accounts receivable department in a more efficient manner.
This whitepaper walks you through how to reanalyze your credit and collections process and how to overhaul it, starting with identifying your business, identifying your weaknesses and how to fix them.
IDENTIFYING YOUR BUSINESS
Collecting from customers is the ultimate frustration for most business owners. Often times, however, it does not have to be as difficult and aggravating as it is. Most companies suffer from simple disorganization in their credit and collections management. Between not knowing who exactly their customers are that they are collecting from or not knowing when their customers are due, this leads to longer collection times. If you want to learn how to collect faster you will need to do an overhaul of your current credit and collections management processes.
To truly fix your credit and collections management problems, you have to start from the very bottom. Analyzing who exactly your business is may seem silly, but it has a great impact on what tactics you should take when collecting.
WHO ARE YOU?
Most businesses start out with one clear, straight forward goal in mind, but as they start to grow they also change. Take the time to redefine who exactly your business is with what products you focus on and who your target market is.
B2B OR B2C?
This is a really important question that greatly impacts your credit and collections management. In a B2C setting, where you are serving individuals rather than business or organizations, you often are paid at the exchange of the good. There isn’t much invoicing going on. In a B2B situation, sometimes you can get lost in the crowd. Businesses are paying off many invoices at one time and you will need to stand out to make sure you’re in the front of the line.
Defining your industry and specifically as possible is extremely helpful in credit and collections management. First of all, each industry has their average net days. If you’re in the law firm industry trying to compare yourself to a manufacturing industries typically days sales outstanding, you’re going to have problems. Secondly, each industry is unique in collections. The construction industry will sometimes have to deal with mechanics liens and the transportation industry will need to deal with freight bills. Determining what industry you’re in can help you set a goal and know what to expect.
Are you serving small businesses or large corporations? There are many different tactics you need to take based on what kind of customer you are serving. If your invoices are mostly small items but in large quantities, it may be best to focus on those outstanding the longest. But if a large corporation has a large bill outstanding, there may be a different approach you should take
Who exactly are you serving and what industries are they in? Every industry expects and needs their invoices to be laid out differently, such as in government or non-profits. Knowing the right way to present your invoices to the customer greatly impacts the speed in which you get paid
Once you have researched these areas of your business thoroughly and have specific details for each one, you can start to address these areas to improve credit and collections management.
IDENTIFYING YOUR PROBLEM AREAS
Once you’ve identified who your customers are and what industry you’re serving, you can move on to step two of the overhaul.
Step two begins with identifying what your problems in credit and collections management are. It is best to make a list of all of the problems you can identify before you begin to tackle them. If you’re not sure where to start or where your problems lie, below are the top five credit and collections management problems.
If customers are continually paying late, sometimes it is best to look internally and see if there is something that you can do to improve the process. Typically there are ways that you can improve invoice presentment to get customers to pay faster. Make sure that you are including customer purchase orders, billable rate or freight rates if needed. Know what is tax exempt and make sure you are not charging a tax. Most importantly, make sure you have the invoice address correct. Review all your late invoices and make sure that the correct information is there because one of the major reasons customers don’t pay is related to invoices containing incorrect information.
In credit and collections management, it is important to know who exactly should be receiving the invoice. This may sound obvious, but something the customer will give a generic email or “accounting team” to send the invoice to. Try to get a specific employees address and name who will be handling the invoice to ensure it will be seen. Also, have a specific date you invoice, whether it is the first Wednesday of the month or every 15th of the month. By having a specific date, customers will be more prepared when that invoice comes around.
If you’re working with excel spreadsheets, old aging reports or entering information manually for credit and collections management, that’s a sign you have problems. Having inaccurate or outdated information for the collections process is not effective to getting paid on time. This will hinder your customer communications, which will lead to customers putting you to the bottom of the payment list.
We can likely all agree the credit and collections management is a huge asset to your business. Without accounts receivable there is no cash flow. A great question to ask yourself is do I have enough staff to manage my accounts receivable? Further, do they have the right tools to effectively manage collections? Take the time to identify your credit and collections management roles from top to bottom. Ask for their feedback on their daily tasks and see if they feel there is a process they can implement to help collect faster.
In the vast majority of reasons companies aren’t paying, it usually is linked to invoice misinformation, invoice delivery issues or bad data. Reasons beyond the credit and collections management team’s hands are usually in the small minority of reasons for missed payment. However, you could be facing problems like businesses who simply refuse or are unable to pay.
We suggest that when tackling these problems, you take on one or two at time. If you try to fix them all at once or generally, you will likely miss the mark.
FIXING THE PROBLEMS
Once you have been through the first two phases, you’re ready to get to step three of credit and collections management. This is where the real hard work begins.
Step three of credit and collections management is actually fixing the problems you’ve identified. These can be done in a variety of ways, but we will highlight some of the big solutions for you.
SET CREDIT AND COLLECTIONS MANAGEMENT POLICIES
Your accounting team should have general policies in place to ensure that invoices are going out correctly. If certain important information is left out such as purchase orders or addressed incorrectly it will likely not get paid. One way to battle this with a policy is by having someone review all invoices past due on the day they are due to double check the right information was passed on. Further, for all big number invoices have a policy that they must be reviewed before they are sent out. The last invoice you want to be late are your big ticket invoices.
SEND INVOICES SOONER
The faster you get the invoice to your customer, the faster they will pay it. This tactic will also let customers know that you are serious about getting paid. Companies that lag behind on their invoicing timelines are typically seen by customers as the least worrisome among outstanding payments. Have a schedule in places for sending out invoices, such as once a week or X number of days after the service was provided.
REMIND CUSTOMERS TO PAY
You can tackle this solution in two different ways, or implement both. The first is to remind customers, by sending out an email or making a phone, that their invoice is due in 3-5 days. The other tactic is to make reminder phone calls once the invoice goes past due. Most companies will say they don’t have time for this, but if you use an accounts receivable software that can prioritize these actions for you, it will be a lot easier.
Going into the process of fixing your credit and collections management practices is useless if you don’t set a goal to achieve. The best one to look forward to is decreasing the amount of time to get paid. During your research you should have discovered what your current days sales outstanding are, make a modest goal to decrease that. This is another area that an accounts receivable software would come in hand, most systems are proven to improve faster payments by 20 percent or 12 days
Now you should have all the tools needed to start tackling your credit and collections management. Although these fixes will definitely improve how long it takes to get paid, make sure you are doing the research first. The more you know about yourself and your business, the better off you will be to start getting paid faster.
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