How to speed up invoicing to improve cash flow
Collecting your accounts receivable deserves your full attention. Repeated late payment can lead to liquidity problems that will impact your working capital and growth.
Despite their importance, billing roles and processes are often unclear in small businesses, notes Florence Bessette, Business Advisor at BDC.
“Accounts receivable are a company’s primary source of liquidity. But it’s often unclear who’s in charge of collecting bills in the company and what procedures should be followed. Everyone does their own thing when there are no bill collection policies or procedures in place. Collecting bills takes time and discipline. It’s vital to the company’s financial health, but often doesn’t get the attention it deserves,” she says.
Have you clearly defined your billing processes? Are you using the right tools to improve efficiency? How do you manage overdue accounts? Here are some tips to help you collect bills faster.
Accounts receivable are a company’s primary source of liquidity.
Florence Bessette
Business Advisor, BDC Advisory Services
Boost the cash conversion cycle
The cash conversion cycle is an important concept in cash management.
It measures the time between purchasing the inventory needed to complete a sale and receiving payment for your sale. Can some delays be reduced?
The cash conversion cycle has five steps:
1. Inventory
You buy goods from your suppliers. You will need to pay your suppliers. This debt is added to your accounts payable.
2. Sales
You close a sale, but it can take a long time to get paid. The customer owes you money. That amount is added to your accounts receivable.
3. Billing
You bill the customer for completed work or a delivered product.
4. Collection
You receive the money in your bank account.
5. Payment to suppliers
You pay your suppliers. Note that payment is often due before you collect.
Example of a cash conversion cycle
The time between when your company has to pay its workforce and suppliers and when you collect your money must be financed from your working capital. By shortening your cash conversion cycle, you can reduce your financing costs and improve profitability.
Let’s see what you can do to streamline billing and collection to optimize your cash conversion cycle.
Identify sticking points and recurring mistakes
Have a quick look at your processes to identify weaknesses and address them.
Billing delays
Putting off billing is a bad habit—you may forget to bill altogether. Send the bill as soon as you have shipped or completed a job.
Unclear payment terms
A lack of clarity in an invoice makes it easier to ignore. Clearly communicate your payment terms and late payment penalties to avoid any uncertainty.
Paper bills and manual tracking
Are you reluctant to digitize your documents or automate invoicing? You could be losing valuable time. Going digital can increase efficiency and help reduce errors, like double billing.
Poorly defined responsibilities
Chasing overdue bills is just one of many tasks for accounting or administrative staff. If their roles aren’t clearly defined and their performance isn’t measured against specific goals, collections are unlikely to improve.
Adopt the right strategies for faster payment
Invest in technology
Whether you use an enterprise resource planning (ERP) system or accounting software, there are many tools available to help you issue and collect on clear and detailed bills.
You can also send out account statements and schedule automatic email reminders for overdue accounts.
Technology cannot replace human contact if the situation continues, but it can be used to manage simpler cases.
Negotiate instalments
If you are working on a big project, you can ask to be paid in instalments.
Keep a close watch on the data
Use a cash flow planner that includes a payment schedule to help you easily identify overdue bills and anticipate liquidity risks.
Pay special attention to the average collection time. It indicates how long your customers take to pay and may prompt a broader reflection on which companies to do business with, or even on your credit policies.
Train your employees
Collecting invoices is a crucial and legitimate step that must become a regular task. However, it involves a human aspect that can be stressful and discourages some people from doing it. Annie Deschênes, Business Advisor at BDC, explains: “Sometimes we don’t get an answer, or it’s no. The important thing is not to upset the customer. To do this, you have to train your employees. You have to help your team learn how to react, how to listen carefully to what the customer says, and use that to find a solution."
Sometimes we don’t get an answer, or it’s no. The important thing is not to upset the customer. To do this, you have to train your employees. You have to help your team learn how to react, how to listen carefully to what the customer says, and use that to find a solution.
Annie Deschênes
Business Advisor, BDC Advisory Services
Calibrate your response
If nothing changes, you might need to step in. Start by listening carefully. Being too strict could harm the relationship. If you want to keep this customer long-term, it’s best to talk with them and find out why they haven’t paid yet.
If your customer is open about their temporary challenges, it can help you agree on a new payment plan and build mutual trust.
“If the customer is struggling and can choose between paying someone who’s treated them with respect and someone who was aggressive, they will pay the person who tried to understand what was going on,” says Annie Deschênes.
If the delays continue and the amount involved justifies it, you can, as a last resort, take legal action or hire an agency to collect the debt. In both cases, the cost will be high.
Implement your new practices
Technology has greatly simplified billing and cash management. Now it’s up to you to review your internal processes to create a strong invoice collection culture within your company and ensure its sustainability.
“It cost you money to sell these services or products,” concludes Florence Bessette. “That money belongs to you.”
Next step
For more information, get in touch with our teams or explore our financial tools.