Accelerating Cash Flow By Streamlining Accounts Receivables

Streamlining your Accounts Receivables will result in improved cash flow for your business. Entrench these steps into your business system you will find Accounts Receivables less of a hassle.

Asking for money is probably one of the least enjoyable jobs in business. If it isn't handled right, it can have a massive impact on the health and viability of the business.

There is a lot more to getting paid than just asking for money. Getting paid is the result of a whole lot of other actions that flow through the business. Almost everyone involved in the business can have an impact on how quickly you get paid.

Here is a summary of what to focus on to ensure you get paid as quickly as possible:

1. Responsibility for getting paid starts with sales
   
   Your sales team need to understand your ‘Terms of Business' and when to raise the subject of payment with customers. Any variations on contracts need to be documented and approved to avoid reasons not to pay for them. Allow in contracts for deposits and progress payments if possible.
   
   Customer dissatisfaction is a big ‘non payment' excuse, so not allowing this to occur is a must.
   
   
2. Credit risk
   
   This is a big issue right now, with businesses folding and many struggling. You need to be confident of the financial health of customers. It is not unreasonable to ask to see customers' Financials ... real estate landlords do!
   
   You'll need a ‘Credit Application Form' that ties in with your ‘Terms of Business' and meets the ‘Privacy Act', i.e. you need authority to do the checking. Credit references can be useful but should not be relied upon alone, as you are probably going to be given selected good ones.
   
   It's important to verify who new customers are. You should check their registered and trading name as well as ACN and ABN. Check the type of entity - company, partnership, sole trader, trust, etc. - as well as the registered address and primary business address and date of incorporation. If it's an individual you are doing business with, check their date of birth and drivers license number. If any of the information doesn't match up or seems suspicious you need to investigate further and not allow credit to go ahead.
   
   
3. The process
   
   The place to begin is documentation of your process, so that everyone knows what is expected and understands the importance of each step. You want to avoid giving a customer any excuse at all not to pay you.
   
   In service industries, the Project Manager must work to ensure that the client is happy with the quality and progress of the work. It helps to get a Project Manager to pre-approve the amount of proposed progress invoices.
   
   
4. Invoicing
   
   The most vital point about invoicing is to get it done ASAP. Why give a customer an extra 20 to 30 days of credit? If possible, arrange for invoices to be sent with goods and invoice progress payments on jobs / services.
   
   Have a system for immediately invoicing services. Follow-up on major invoices to ensure the client has received the invoice. Invoices can often be delayed by the authorisation process, or going astray.
   
   Professional looking invoices get taken more seriously. Make sure they contain all the information such as right entity name, right address or location / branch. The date of invoice and credit terms need to be highlighted and including the ‘due date' helps to avoid any misinterpretation. Including a purchase order or works order number helps too. Simple wording on the invoice about what it is for will save time in unnecessary investigation as well as stating the name of the person who placed the order.
   
   
5. Payment
   
   Getting deposits and progress payments on big orders or jobs is the best way to reduce your outstanding Accounts Receivables. Providing as many ways to pay as possible is going to speed things up, such as Internet banking, Bpay and credit cards. Credit cards can be a contentious issue, but paying merchant fees can cost less than waiting 90 days for a cheque to appear.
   
   You can offer early payment discounts so long as it doesn't eat up all the profit. If customers are struggling, the sooner you make arrangements to pay amounts off, the sooner the debt is paid.  If a customer exceeds their terms, you can offer Cash On Delivery terms until the account is back in line.
   
   
6. Reminders
   
   In order to remind customers when to pay you need a system to let you know when they are due. A series of email messages, depending upon the time overdue with relevant wording is useful.
   
   Statements with hand written notes on them or personal emailed messages can personalise the issue and get your payment ahead of others. You can even include marketing messages on statements to let customers know of other goods / services available.
   
   Often payments are waiting for a telephone call. I would strongly recommend having one person and a good system for tracking excuses and promises of payment.
   
   Timing of reminders should be when payments are due or promised. Don't assume customers will remember. Always be courteous and polite in follow-ups, as you want to keep working with customers, so long as they aren't habitual poor payers.
   
   
7. Reporting and reconciliations
   
   Accounts Receivables needs to be put on management meeting agendas, so it doesn't get forgotten.
   
   A great target or Key Performance Indicator for Accounts Receivables is ‘Accounts Receivable Days'. This is not to be confused with the terms you offer customers. The ‘Accounts Receivable Days' is the average number of days that all customers are taking to pay you and is calculated as follows:
   
   Accounts Receivable / Revenue x Time Period = Accounts Receivable Days
   
   For example:
   
   Accounts Receivables = $150,000
   
   Revenue = $800,000
   
   Time Period = 365 Days
   
   150,000 / 800,000 x 365 = 68
   
   This example shows that a business with Revenue of $800,000 and Accounts Receivables of $150,000 is taking, on average, 68 days to collect payment from its customers. This may come as quite a surprise if the stated terms are 30 days!
   
   This is a very simple number to target and graph so the person responsible and management can see performance.
   
   
8. The debt collector
   
   When all else fails don't be afraid to send in the debt collector. I have seen many recoverable debts get simply ignored for want of the services of a reputable collector. It doesn't have to mean the end of your relationship with the customer, as good collectors are polite and professional.
   
   
9. Debtor finance
   
   This may be a good short-term option as it can be expensive and you don't want to erode all your profit. You may not have to include all of your Accounts Receivables and it can be a useful option to get over a ‘hump'. You can finance Receivables either publicly or privately, i.e. noted on invoices / statements or handled in the background.
   
   
10. Develop key performance indicators for Accounts Receivables
    
    Making key performance indicators the responsibility of particular individuals and teams is a great way to start. You can then follow up on them at performance reviews. Examples of KPIs are billings within a number of days, Accounts Receivable Days and number of disputed invoices.

Sue Hirst, Director, CAD Partners (CFO On Call). CAD Partners is a team of Financial Controllers who can review your accounting systems, advise on how you can improve your cash position and profitability. Please feel free to call us on 1300 36 24 36 or visit the website: www.cadpartners.biz. Mention this article to receive a FREE Financial Health Check. There is also a FREE e-book on Cashflow control available to readers of this publication. To see further details of this e-book go to www.cadpartners.biz
First published: 29 June 2009.
Last updated: 29 June 2009.