The relationship between a company’s profitability and its cash flow, while straightforward, isn’t always fully understood. Many businesses, especially sales-oriented companies, tend to manage operations from the bottom line, believing that if sales are increasing, the business is profitable and success is guaranteed.
The problem with this thinking is that businesses don’t pay their vendors from the bottom line, they pay from positive cash flow. Too often, sales-oriented businesses are so eager to get new clients, that the structure required to get paid for current work isn’t fully fleshed out. Suddenly, the funds needed to pay current invoices are not available, and the company is at risk of selling themselves out of business by not properly managing cash flow.
Get a grip on accounts receivable
The best course of action is to get a firm grip on accounts receivable before it becomes a problem. This will give you enough cash on hand to stay ahead of bills and still have funds left over to invest in the future.
Until payment is received (positive cash flow generated) any transaction can’t really be considered complete. Too many outstanding customer payments lead to cash flow problems. Getting paid should always be a priority, but before any receivables get collected, several actions are required to help guarantee receipt of that payment.
When customers owe you money, there shouldn’t be a major investment of time and manpower on your part to get paid. For any accounts receivable process to work, it starts with accurate data collection. This includes information regarding the product or service rendered, price with tax, any discounts that might apply, expected payment date, and any other information relevant to that specific transaction. If this is a manual process or data needs to be applied to different programs, the process can be time consuming and prone to errors.
Automation makes the process more streamlined
Part of the success of any accounts receivable effort is the ability to establish the right payment terms. The amount of time you offer customers to make their payment should be considered carefully. The longer the
payment term, the more credit you are extending to your customers. Conversely, the shorter the term, the quicker you get your money—theoretically. The typical payment cycle for goods or services ranges from 30
to 90 days.
The best approach is to set terms that work financially for you, but also are fair to your customer. Perhaps you want to include an incentive, such as a discount, to clients who pay early. For example, you could offer a 2%
discount on an invoice if paid within 10 days. Whatever term works best—say it is a 30-day deadline—be sure to include that data on all future invoices.
The biggest obstacle to positive cash flow is customers who don’t pay on time. When that happens, instead of having capital available to pay your own vendors or make your own payroll, your money is tied up on your balance sheet. One of the first steps to speed payments is to set clear and concise credit policies. Set responsibilities with your sales or finance department about when to extend credit, how much credit to extend, and what penalties to impose on overdue accounts. Then commit to process all credit applications within a specified time frame.
Think carefully about the wording of terms you decide upon—a little bit of courtesy can go a long way to speed payments. For instance, asking politely for payment within 21 days always beats a statement such as “due in
full on receipt.” Knowing your clients well, as you do, and understanding what motivates their operations and payments can help you choose the best strategies to get paid while still appearing friendly.
Just as important as the information that goes into creating the invoice is the data that determines who will receive it. You need to keep track of contact information for key accounts payable contacts. You probably want to verify this information monthly to keep up with any changes. Equally important for larger businesses, is the need to have at least one additional manager’s contact information, or an owner for smaller businesses, should be there ever be a need to escalate communications. When payment is overdue you will also need an accounting department contact.
The collection process undoubtedly runs smoother when your customers understand payment terms completely so there are no obstacles to receiving payment.
Software simplifies accounting routines
Every month, the billing department goes through the same process. All your data has been collected and verified and it is time to run the latest batch of statements. If you mail invoices, it can take hours or even days to
print, stuff envelopes, and apply postage. Once they get sent out, any number of reasons can keep payment from being delayed. Your ability to reduce the amount of time between billing and payment collection is imperative, and integrated accounting software can streamline that process and improve cash flow.
Easily integrated with emailed invoices, document management capabilities allow account information and all related assets to be readily accessible from anyone in the organisation including accounting, sales and
even collections. Statements can be sent electronically instead of through the mail, which reduces cycle time, improves cash flow, and drives efficiency in the accounting department.
Every business benefits when it’s easy for customers to settle their accounts. Offering flexible payment methods including, credit card, check, pay pal or other self-service options can also speed the receivable process.
Automation serves all business needs
If you are working in separate systems that require a lot of duplicate entries, the system you’re using is old or inefficient, or you’re still using a spreadsheet to track billings, it’s probably time to consider upgrading.
According to Inc. magazine, the more professional your billing system is, the more likely your clients will pay up in a timely manner.
An enterprise resource planning (ERP) system can handle not only all the accounting around your business transactions, but also take care of product ordering, inventory, setting delivery routes, and managing a variety of other processes required to run your business.
ERP systems will manage point of sale, inventory management, purchasing and receiving, electronic data interchange (EDI), and reporting while saving time and virtually eliminating input errors.
In the same way that leveraging technology can improve your inventory management and purchasing process, it is imperative that businesses leverage all the benefits that an ERP system can offer to improve cash flow.
Think about it for a minute. With an ERP, accounts receivable is no longer a headache, as all the transaction information is available in one system and managing/tracking paper invoices is no longer necessary. With the help of an integrated ERP, your customer’s payment history or purchasing patterns are just a click away.
Don’t sell yourself into debt. ERP insights will allow you to efficiently monitor, manage and maintain a healthy cash flow on your terms.
White paper written by ECI Solutions