This article, written by James LaMontagne, was originally published by the NH Union Leader and can be found here.
Good financial hygiene is critical to the success of any business. Whether collecting accounts receivable, budgeting cash flow or tracking inventory and expenses, businesses should have strategies and processes in place to achieve their financial goals.
Accounts receivable
Keeping your accounts receivable current or within 60 days is critical to successful collections. Studies show that collection of accounts within the first 60 days have a collection rate of more than 90%, while balances that remain outstanding past 90 days have collection rates that drop to 50-60% and after 120 days, collection rates drop to 20-30%. The message is clear: When collecting debt, time is not your friend. Accordingly, a business needs effective strategies to ensure timely and effective collection of its accounts receivable.
Some strategies to consider:
Clear and understandable invoices delivered to the correct person: First and foremost, ensure that your invoice is being sent to the correct person at your customer’s company. Sending your invoice to your customer contact doesn’t guarantee that your invoice will find its way to your customer’s accounting team, and an invoice delayed in reaching accounting is an invoice delayed in payment. Remember, your customer contact is not necessarily your accounting contact, so ask your customers to whom your business should submit invoices. Additionally, invoices should include, among other things, an invoice date, contact information for both the business and customer, a unique invoice number or another identifier, payment terms and deadlines, an itemized list of services with a unit price, quantity and total price for each line item, and a clear and obvious total invoice amount due.
Simplify the payment process: Invoices should indicate which payment methods your business accepts. Telephonic or online payments should be offered to customers. In the case of electronic invoices, a clickable link that allows a client to pay via credit card or other electronic transfer should be included.
Proactive accounting: Have defined steps to follow after a customer has been invoiced. Follow-up on unpaid invoices with emails or with telephone calls for those more pressing debts. Set an internal policy to pursue debts more than 14 days late with telephone calls, which customers often find harder to ignore than emails.
Communication: If a customer’s payment patterns change, communicate with that customer to determine whether increased collections efforts are needed, if a credit hold or C.O.D. terms are warranted or if upfront payments or deposits are necessary moving forward.
Give options to your customers and speak to the right person: Provide your customers with options to pay their invoices. Depending on the circumstances, ask if they can pay a portion now, and the rest later or whether a one-time payment could be made if the invoice was discounted. Ask whether they could use their credit card to pay you. Additionally, and while seemingly obvious, it’s important to speak with the person who’ll actually be paying the invoice. Again, your customer contact may not be the correct person to speak with when asking that a past due invoice be paid.
Cash flow: One of the biggest reasons businesses fail is diminished cash flow. A business owner needs to understand where the cash is coming from and how it’s being spent. Creating a budget (a 13-week budget is typically recommended) allows a business to identify what cash is expected and when it is expected. A budget also allows a business to balance the incoming cash against the amounts the business will need to spend during the same time period. And finally, a budget provides a business with the opportunity to make proactive adjustments where and when needed.
Inventory: Inventory reduces cash while the inventory remains unsold. Businesses should hold only that inventory that is more likely to sell. Review your sales over the past several quarters to determine what inventory turns quickly and what inventory grows stale.
Expenses: Reduce spending and cut costs as best as the business can without reducing the quality of product or services. In connection with the 13-week budget and the regular review of inventory, determine if there is a way to reduce a cost (e.g. using a different vendor or different method of shipping) or eliminate an expense for an item the business can do without.
Owning and operating a business is difficult, and to be successful requires, among many other things, hard work, tenacity, a little bit of good luck and most certainly good financial hygiene.