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ways effective collections process improves your cash flow

Growing a business is hard work. But it’s almost impossible to grow if you don’t manage cash flow properly. Effective cash flow management is crucial to the overall health of the company and ensures you can sustain investments in further growth (such as expenditures allocated towards advertising, additional employees, research & development, etc.).

Unfortunately, cash flow is often neglected by small business owners. One of the main reasons is that cash flow cannot be calculated very easily. Cash flow is derived from a variety of factors, including financing, operations, and investments and it can be time consuming to calculate. QuickBooks does provide an out-of-the-box report and you can use it as a starting point.

How to Improve Your Receivable Collections Procedure for Better Cash Flow and Growth

For this post, we won’t cover the attributes of the entire cash flow calculation. However, we shall discuss how effective accounts receivable management improves cash flow and unlocks funds for further growth.

3 Steps to a Better Collections Process

Before we take a dive into the positive impact receivables management has on cash flow, it’s important to highlight ways you can improve your collection procedure. Here are a few notes on how you can immediately increase the rate at which you collect on your open receivables balance:

1 - Develop a system

One of the most important aspects of your company’s collections process is the system. When growing a company, it’s important to develop organized processes for all major components of your operations -- and collections is no different. A well-documented approach to collections allows your team to be consistent with communications and include touchpoints with customers throughout the payment process. For example, it’s important to send out invoices promptly, follow-up a few days before they are due and send a note immediately once it becomes overdue. Furthermore, once you have a good collection system in place, it’s important to assign accountability to someone on your team or an outside vendor to work through the collections process.

2 - Send a Proper Invoice

Many organizations will not pay an invoice if you do not include all of the required information. Before sending an invoice, make sure you check the customer’s invoicing requirements (perhaps referenced in a contract or service agreement) and include all of the required information. Some important elements include a unique invoice number, invoice date, payment terms, payment instructions, address information and even a W9 (if needed). In many cases, customers are not proactive in identifying invoice issues up front, so you can avoid delays later on by validating the invoice information.

3 - Accept Multiple Forms of Payment

Every business handles their payments differently. These days, customers have a range of options available for payment including checks, PayPal, credit cards, ACH, wire transfers and more. If you want to expedite collections, it is often helpful to allow multiple forms of payment and reference the instructions on your invoice. You’ll find that companies are very likely to process an invoice faster if it fits within their normal business practice.

Unlocking Extra Funds for Business Growth

Let’s face it, most small businesses are looking for ways to grow...whether that is through greater profitability or increased revenue. One of the best ways to spark growth is through the access of additional cash. When your company has more cash on-hand, it has more options available for sponsoring growth initiatives.

Here are a few ways an effective collections process puts more cash in your pocket and enables you to make investments in growth activities.

1 - Decreases late fees from vendors (accounts payable)

One of the biggest reasons companies struggle with cash flow is that they do not collect payments fast enough to pay for short-term liabilities.

Let’s say you’re running a project-based business and you have to pay subcontractors. Well, if you don’t collect payments promptly from your customers, then you may incur late fees from your vendors. The extra late fees and constant juggling of a project’s cash position can cause stress on the business. In addition to late fees assessed by vendors, you may also find it difficult to get favorable terms in the future.

2 - Decreases interest fees charged on lines of credit

When managing cash flow, many businesses turn to lines of credit when they face a deficiency in their cash. Depending upon the stage of your business, a line of credit can be expensive. If your business is in its early stages, a line of credit offered by a lender may be close to 30-40% APR. As an alternative, if you can increase the efficiency of your collections process and gain access to your customers’ cash quicker...then you can avoid the higher costs of working capital.

3 - Decreases time spent by employees on collections

One of the most important aspects of a receivables management process is the system. If your company can document and map the process and roll out a clear path for collecting payments, then your operations are going to be more efficient. Thus, employees will not have to scramble to collect overdue payments and time won’t be wasted on strategies for collecting overdue invoices.

Conclusion

Ultimately, cash flow is one of the most important drivers of growth for a small business. By implementing an efficient receivables management process and collecting payments according to your payment terms, you have the ability to unlock extra cash for your company and invest in growing. Use the cash you have on-hand to invest in advertising, launch a rebranding effort, invest in supplies and more.

Our guest contributor Tristan Pelligrino is a lifelong entrepreneur who has founded several small companies. He started his career as an IT consultant working for large organizations like PwC, IBM, and Oracle. After an early career in consulting, Tristan branched out to create a leading regional video production company and digital marketing firm, and he is now focused on spearheading financial management with small businesses at Receivable.io.

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