Unpaid invoices are a cause of concern for any business. They dry out the cash inflow and reduce the cash at hand, which may impact the operations and cause admin headaches. Money strapped in unpaid invoices means insufficient capital for inventory or even investments. On top of this, small businesses with limited resources will now have to spend time and money chasing down unpaid invoices, which may impact the company’s overall productivity, which is already strapped for cash.
Particularly for a small business that lacks the same financial cushion as a large business, the growing debt of unpaid invoices can cripple an entire business. As a remote accounting firm specializing in Accounts Receivable, the most common problem we are often consulted to solve is unpaid invoice collections.
While collection strategies differ based on business, a few common tweaks can be made to improve the collection of invoices and reduce overall AR. If you are a small business that is facing collection problems in your AR, here are three methods/tweaks that can help:
Offer discounts for early payments & Charge late payment penalties: An early bird discount for the early payments and yearly rewards programme is often the most effective tweak small businesses can make to improve their cash flow. This can be hugely beneficial when the early payment terms and conditions are crafted based on factoring in the business’s deadlines and specific cash requirements. At Back Office Accountants, we analyse the cash flow needs and account for the potential requirements before offering payment terms.
If an early payment discount is a carrot, a late payment fee, is a stick that is mighty effective in improving collections. So institute a late payment fee if you haven’t already, and make sure you communicate the same on every invoice. Consider the long-standing partnership in a few cases when levying late fees.
Have a payment portal in place with versatile payment options: In a few cases, having clear visibility of the payments being processed may result in better communication between the parties. Lack of limited payment options also plays a part in payment delay.
In rare cases, you may be forced to mistakenly levy payment charges due to a lack of visibility and communication. Simplifying payment processing and communication can help businesses tackle these problems. We suggest a common payment portal containing all the invoice and payment information, outstanding and paid invoices, and a range of payment options. Include the link to the payment portal in every communication you make about the invoice payment to simplify the Payment further.
Deposits, credit card preauthorization & invoice factoring: Collecting a guarantee as the partial payment against the final Payment is the easiest way to reduce the risk of non-payments and avoid a potential loss. One can also have the client sign and preauthorize to bill their credit card after completing work in stages. Having a signed authorization also make you immune to any disputes that may crop up.
Invoice factoring is a method that is usually considered when one gives up the invoice and chooses to convert them into finance. Invoice factoring can greatly relieve small and medium businesses facing cash flow problems due to unpaid invoices.
Craft a standard communication plan & protocol: Most businesses need to maintain a formal communication plan with the proper protocol for follow-up and escalation, which inevitably reduces the collections of their AR team.
An efficient communication protocol starts with presenting the terms and conditions in the agreements and the due dates shown in the plan in clear and bold language. A polite email reminder as you near the due date, followed by a polite follow-up after the due date, is customary. A firm follow-up, along with a deadline followed by formal escalation, is the common outline of the protocol. Business must customize their communication protocol based on the relationship. Regular long-standing customers must be carefully handled to avoid the risk of starting the relationship, according to our Accounts Receivable experts at Back Office Accountants.
While all the above tips can help improve the collection, most problems usually start right with the onset of communication protocol. Having the proper communication protocol can solve half the problems of the small business, and implementing the above tip scan reduces the risk of the other half. However, most businesses may need more resources or expertise to improve their Accounts Receivable Collection. In such cases, Outsourcing Accounts Receivable to remote accounting firms can be a safe, viable and effective solution to improve collections. If you are a business that is looking to outsource your Accounts Receivable, you can contact us here: https://www.backofficeaccountants.com/
