Are Past Due Balances Putting Your Cash Flow at Risk?

Cash is the lifeblood of every business. Maintaining healthy cash flow is key in providing sufficient working capital to fund operations. One potential cash flow trap is accounts receivable. If you have a business that sells to wholesale customers, you typically have to offer them payment terms. Collection from these customers can be a challenge. Sometimes they experience cash flow issues of their own and experience difficulty paying you in addition to all their other vendors. However, in many cases, the problem is self-inflicted. There are several steps you can take to encourage speedy collection of your accounts receivable.

Preventative Measures to Prevent Late Payments

Efforts to promote timely collection of accounts receivable begins at the time you receive the order. Below are measures you should take on the front end to help your customers pay their bills on time:

  • Require purchase orders from your customers. This documents the terms of the order and provides the customer’s payables staff with the necessary information to process payment. I have reviewed A/R agings showing past due invoices with the purchase order field either blank or listed as “verbal’ or someone’s name. Invoices without a valid purchase order number will typically be diverted to a manual approval process by customer staff which can be time consuming and not a priority. Insist on obtaining a valid purchase order for all orders.
  • When you receive the order, confirm all the terms of the order are accurate. If any terms of the order are not accurate, inform the customer and ask for a corrected order. Reconciling a price difference is one of the most common issues that will delay payment of an invoice.
  • Send an order acknowledgement confirming the terms of the order. This gives the customer the opportunity to double check their order and respond to any discrepancies.
  • Make sure shipping documents match up with what was delivered. Make it simple for your customer’s receiving staff to match up your packing list with the goods shipped. If a carton contains multiple items, label the carton with the contents and quantity. Otherwise, the customer may withhold payment for items they did not believe they received.
  • Avoid backorders. Plan shipments so that orders will be shipped in their entirety. Multiple shipments lead to confusion on quantities received resulting in delayed or short payments.
  • Send invoices promptly after the goods or services have been delivered. While this seems rudimentary, I have encountered many situations where invoices were not sent immediately due to staff on vacation or working on other tasks, price not determined, or shipping procedures not followed.

Maintain Consistent Communication

Following these practices will improve the accuracy of your invoices and make it easier for your customer’s payables staff to process your invoices reducing delays in payment. The next step is to establish a consistent communication process. Develop a progressive communication plan that is positive in tone but informs customers of your desire to be paid. A communication plan might include:

  • Within one week of invoice due date, send a friendly email listing the invoices that are coming due with a request to contact you if there are any questions or issues. Quite often, an invoice was not received or misplaced.
  • At one week past due, send a follow up email informing the customer the invoice is past due and asking if there are any issues with the invoice.
  • At two weeks past due, call the customer to ask if there are any issues with the invoice and, if not, ask when it will be paid.
  • Continue to call on weekly intervals to determine status.
  • If unpaid after four weeks, determine what additional action should be taken. This may include contacting customer management, withholding shipments or other collection procedures.

Setting Boundaries

One of my favorite tricks is when an order is received from a customer who has an amount past due is to contact them and thank them for their order. Then, ask about payment for the past due invoices in order to avoid any possible delays in shipping this order. You are not saying the order will be held, just implying that the account needs to be kept current. It also helps to develop a cordial relationship with your customer’s payables staff. It makes it easier for you to make collection calls when they are friendly conversations about payment issues plus the payables staff typically has significant influence over which bills get paid first. Also, send a thank you note periodically to show your appreciation for their efforts. This can go a long way toward getting you at the top of the payment priority list.

While these steps will not guarantee prompt payment of invoices, they will go a long way toward speeding up collection of your accounts. Feel free to contact me if you have any questions or wish to discuss other ideas to turn your accounts receivable into cash.

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