A report says that about 4,00,000 businesses open each year, but shut down within 5 years. 82% of businesses claim cash flow as the top issue for their failure.
For accounting firms, especially the small ones, the balancing act of keeping track of the cash flow, streamlining, and ensuring that it is all happening on time can be difficult. Collection of money from clients or vendors is never a pleasant task, especially when you have to keep sending them reminders. If the overdue amounts get out of control, they can cause serious cash flow problems.
An effective collection management process lies at the heart of influencing cash flow positively. Reducing the number of days payments remain outstanding is known as the crashing of the days of outstanding. This impacts an accounting firm’s financial health. The checklist below is designed to become a comprehensive guide to optimize collection practices and ensure seamless management, improve liquidity and cash flow, and reduce the risk to financial health.
Checklist to an efficient collection management process:
Pre invoice preparation:
- Customer Credit Assessment: This step includes thorough credit checks before determining if a customer is eligible for credit.
- Payment Terms: Lay out the payment terms clearly and thoroughly.
- Customer Onboarding: Curate a package for customer onboarding – payment process, POC, and FAQs are some of the common details to be included.
Accuracy of invoices and deadlines:
- Ensure invoice accuracy: Check as many times as needed to ensure accurate and error-free invoices.
- Timeliness: Send invoices promptly after goods and services are delivered. Maintain consistency in the frequency.
- Detail out the invoices: The more detailed the invoices are, the lesser the chances of back and forth. Include due date, items charged, payment instructions, payment modes, contact information, etc.
Communication and follow-up
- Set up automated reminders: Automated reminders before and after the due date relieve you of the additional efforts.
- Consistency in follow-ups: Implement a schedule for the follow-up on outstanding invoices.
- Communication with customers: Set up communication channels with customers regarding their payment status and other payment-related issues.
Payment methods and options:
- Multiple payment options: Make sure you do not limit the payment options. Create as many as possible. Some of them can include credit cards, ACH, online payment portals, cheques, etc.
- Easy payment process: Simplify the payment process for customers to encourage prompt responses.
- Payment plans: Provide flexible payment plan options for customers in financial hardship. However, do not open this option to all customers.
Monitoring and reporting:
- Monitor regularly: Monitor accounts receivable regularly to identify overdue accounts early.
- Aging reports: Use the aging reports to track the number of days outstanding. Curate a strategy for collection.
- Set the performance metrics: Set and track the KPIs such as Days Sales Outstanding, collection effectiveness, and dispute resolution times.
Dispute resolution:
- Clear policies: Set clear policies in place even before you onboard to handle disputes and communicate them to the customers.
- Documentation: Maintain a detailed record of all communication – written or recorded to find easy resolution for disputes.
- Dispute Management Systems: Set up a system for promptly addressing and resolving disputes related to payments.
Incentives and penalties:
- Discounts for early payments: Offer discounts when clients make payments upfront and early to encourage quicker payments.
- Penalties for late payments: Enforce penalties when clients make late payments to discourage regular delays.
- Loyalty programs: Curate loyalty programs for customers who have a history of timely and regular payments.
Collections and escalations:
- Internal collections: Train your in-house or outsourced teams on effective collection techniques.
- Third-party collections: Besides your team, you can partner with a reputable collection agency to collect payments beyond a certain threshold.
- Legal measures: When nothing works, be prepared to take legal action for severely delinquent accounts.
Technology and automation:
- Accounting software: Many software are available that help streamline accounts receivable processes. Choose the one that suits you best to automate and streamline.
- Integrate the CRM: Integration of the Customer Relationship Management systems allows tracking of customer interactions and payment history.
- Data analysis: Use data to identify trends, spot anomalies and find areas of improvement in the collection process.
Continuous improvement:
- Feedback loop: Make the collection of feedback from customers a regular practice. Train the staff to identify the pain points early in the collection process.
- Process review: Gain updates and constantly review the collection processes and procedures.
- Training and development: Provide ongoing training for staff on best practices in collections and customer service.
Legal and compliance:
- Regulatory compliance: Ensure all collection activities are aligned with the laws and regulations.
- Privacy protection: Protect customer data and respect privacy regulations for your customers.
- Ethical practices: Maintain ethical standards in all collection activities.
Make your collection process easier by outsourcing your Accounts Receivable with Finsmart Accounting. Write to us at connect@finsmartaccounting.com for more.
Director Growth Strategy & Alliance
Maanoj Shah is a finance and outsourcing expert with strong Business Strategy and Scaling-up experience. Over the last 20 years, he has incubated multiple businesses and helped build global enterprises in verticals as diversified as hospitality, technology, and healthcare.
