Small business owners often miss how critical receivables management is to maintaining cash flow and controlling costs.
There are several strategic ways to go about this:
Reducing days sales outstanding (DSO). In my last blog, I talked about how to calculate the valuable DSO number. The most important thing you can do is start measuring your DSO regularly and consistently. Decreasing your DSO can free up more cash than you realize. Increases in your DSO can mean your customers are less satisfied than they were before. UPS, the shipping company, calculates DSO by customer. If they see a downward trend they immediately make a customer service call.
Your AR department is your most important customer service team. They are always dealing with your customers’ money and people are sensitive about money, even in a business situation. Developing the skills within your organization to take the emotion out of the AR process improves customer service. Every aspect of the sales cycle from order to collection is influenced by customer service. Recurring sales are often influenced by customer relationships; your AR department can cost you if it is not professionally monitoring and managing collections and customer relations. More often than not, the small business owners we talk to feel they should make the collections calls themselves. We feel that this is not a best practice – more about that in an upcoming blog.
Carefully reevaluate the assumptions behind your AR to collections policies. You may never make collections calls before 60 days because you assume your customers will be offended if you follow up before then. Would your aging improve if you made calls at 15 days to verify receipt of the invoice? Most non-payment is due to a dispute. The sooner you know about disputes, the more quickly they can be resolved, reducing the negative impact on your cash flow. What other assumptions are keeping you from successfully converting receivables to cash effectively?
Get creative. You know your business better than anyone. What can you do to decrease accounts receivable overhead and processing costs? Can you standardize price lists and proposals? Are you requiring written quotes? Can you standardize collection strategies by type or value of customer? Are you able to process alternative forms of payment? Is there any way to reduce sales cycle time?
Improving your AR management can lead to significant financial gains, something everyone wants for Christmas.