How to set up a systematic and efficient cash collection process?

Alex Louisy, CEO
Alex Louisy, CEO
May 25, 2020

This article has been co-written by Luis Lomanov, Managing Partner at Upward Insights and Alex Louisy, cofounder at Upflow.

A recent study on late payments conducted by Dun and Bradstreet found that, on average, 50% of invoices are still paid late in the US, with significant differences that can be observed from one sector to another. This has become a major concern for business owners.

When it comes to chasing invoices for B2B companies, it can sometimes be a sensitive subject. And yet, it is a fundamental step in the order-to-cash cycle and is paramount in ensuring business growth, since most of your Customers won’t pay you on time without the right tracking system in place.

How can B2B companies efficiently track the status of payments being collected to safeguard their cash flows and prevent them from turning into unpaid invoices? Here are some recommendations that we’ve gathered from top-performing finance teams to improve how your Accounts Receivable (AR) is managed.

Chasing unpaid invoices: the weak spot in the order-to-cash cycle 

We discussed with Luis Lomanov, Managing Director at Upward Insights, a firm specialized in helping high growth businesses set up scalable financial processes and systems.

The issue is often the same: there’s no structured process when managing AR. Every once in a while, the company’s CEO will look at an ageing report and realize that there’s too much cash outside of the business. She turns to her CFO, who then turns to his controller. From there, the controller frantically spends the next couple of days sending emails and calls to customers... Issues start to resolve themselves and overdue invoices get paid… Until the next wave of cash flow problems where the broken process repeats itself.

Late payment reminders often fall outside of sales cycles. Stranded between different teams whether it be finance, sales, or management, reminders like that aren’t a priority for any single department within the company. And yet, they should be a top priority for everyone. Bringing cash into the business is just as important as sales and production. It’s also a key indicator of the business’s health and its good-or-bad performance.

Finance teams are usually on the front lines when it comes to cash collecting. However, finance teams often lack the time and resources necessary to focus on more than just the largest outstanding unpaid invoices. While it makes sense to address the most urgent matters, oftentimes they end up neglecting smaller amounts of even more outstanding, yet smaller invoices. Most importantly, when calculated as a whole, these smaller invoices can end up representing a significant amount.

Most of the time sales teams are out of the loop when it comes to unpaid bills. This is “not their responsibility”, is too time-consuming, and we often hear C-levels saying “our salespeople should be more focused on closing deals, and nothing else”. While it is common for sales teams to be paid on commission, these commissions are usually based on the amount invoiced, and not the amount of cash collected by the company. This does not incentivize them to participate in debt collection, even though these teams are responsible for handling customer relations.

A customer who doesn’t make amends to pay may just simply be a bad customer. It should be a primary concern for salespeople, especially when dealing with returning customers. How is it possible to build long-term relationships with customers that do not pay your Company?

Top management and executives should also be concerned about unhealthy AR. A wobbly cash collection process, forgotten invoices, and bad paying customers are risks that impact their working capital and quickly translate into additional financing needs for the company. 

Systematic cash collection processes can be tricky to implement since accounting and billing tools are usually poorly adapted to tracking late payments. Improving AR management is a cross-disciplinary business problem. Solutions that attempt to address this problem without involving finance, sales, and management teams are usually doomed to failure. Having all teams stay on top of receivables is key to the company's performance and long-term success.

Get to know your late paying Customers

Luis gave us a great tip on how to classify late-paying customers and how to identify them. He likes to think of the aged AR list as consisting of 3 types of customers: "The slipped through the cracks customer", "The perpetually late customer" and "The one who never pays".

1) The Slipped Through the Cracks Customer

  • This customer frequently says “I’m so sorry, I didn’t even realize this was an issue. Let’s resolve this ASAP”.
  • This is a good customer

2) The Perpetually Late Customer

  • This customer frequently says “Oh that’s right. Sorry. The Accounts Payable manager is on vacation and we’ll pay it once he’s back”
  • This is often a stalling technique because the business is having cash flow issues
  • If excuses are a norm when talking to this customer, decide if you want to keep them as a customer for much longer

3) The one who never pays

  • This customer frequently says “Your service is crap and I don’t intend to honour the agreement because you under-delivered and I can’t give you specifics” or “We’re experiencing some challenges and have to prioritize cash outflow”
  • Unless your service really sucks, these customers were never going to pay you anyway and likely treat their other vendors the same way. Learn to identify them early and not do business with them

This is an excerpt from the book Financial Foundations: Entrepreneur’s Guide to Becoming a Builder

By setting up a systematic cash collection process, you’re more likely to identify those types of customers early and manage them proactively.

Designing the best cash collection process for your business

Over the last few years, we’ve talked to hundreds of business owners at Upflow and Upward Insights. Here are our findings from the best-performing companies when looking for the right practices in setting up an efficient cash collecting process. 

Systematic

All unpaid invoices must be followed-up with unpaid reminders. It’s an obvious fact, but it is rarely the case. 

Systematization, like automatic dunning, will solve the majority of AR problems because most customers want to pay - they just forgot and need a reminder. By addressing the easy accounts with systematization, you can now focus the hard leg-work on the more difficult accounts. Systematization will also help you identify problematic customers because those are the ones who ignore automated dunning. Now you know who they are, so you don't have to waste time figuring out which customers will be problematic and need special attention.

Additionally, reminders must go through a clearly defined timeline to identify which issues are 

  • related to technical issues invoices not received, errors in billing content, an invoice pending internal approval) usually managed by your finance/controller team
  • or relating to commercial issues (problems with services, credit notes, returns) that are usually taken care of by account managers

It’s important to create a systematic escalation process, with proactive steps.

Most customers want to pay. They just need systematic reminders. For the remainder, the earlier you find the issue, the faster it’ll be resolved or addressed.

Personalized

Efficient reminders take into account your customer’s business context. The root cause of late payments may vary significantly from one customer to another, different geographic locations, payment methods, etc. The more you take into account their business context, the more likely you are to have an impact on customers.

On the contrary, we often see impersonal, inaccurate, automated emails that do not reflect the business context and relationship you have with your Customer. At best, customers dismiss these emails, and worse, they could potentially damage your relationship with them.

Personalize your reminders to improve your response rate and find the solution to resolve underlying issues with late payments faster.

Team-work 

Even though first reminders are often sent out by finance teams, project leaders or sales teams often need to intervene when a commercial issue has been identified (dispute, rebate needed, etc.). There should be a seamless and systematic transition between the teams involved, and it’s usually a best practice that account managers be aware of any potential issues with late payments. Their involvement will be a quick-fix to solving the problem faster!

Broaden how your team is aligned on cash collection to make it more efficient.

Multi-channel

Each communication channel (email, calls, texts, and sometimes letters) should serve a specific purpose as part of your cash collection process. Most importantly, they should involve the right people on both ends of the conversation. Sending reminder emails to the right billing contact, calling the finance department, and escalating issues to your commercial contact via different channels allows you to correctly gauge the level of urgency and obtain feedback from your customer.

Diversify your channels of communication to make the cash collection process more impactful.

Quantifiable and data-driven

Set quantifiable and visible objectives to mobilize your teams when implementing your cash collection processes. 

  • To start, these objectives may target reducing the total amount of overdue invoices. “We currently have $1,500,000 overdue, let’s bring it down to $500,000 by year-end” This is a great way to start, but could sound like a one-off.
  • Choosing an objective that relates to the invoice flow on a recurring basis makes more sense if aiming to maintain an ongoing effort. Reducing the average payment delay, or Days Sales Outstanding (DSO) is the best intermediary for this. “We’re aiming to keep DSO below 35 days” is a long-term, quantifiable objective.

Communicating internally on quantifiable metrics and objectives is the best way to align your team around cash collection.

Your turn: Set up the right cash collection processes for your business

Same as with any business decision, changing behaviours is where it starts. Accounts receivable are usually managed correctly when top management makes it a priority for the company. That’s your first step! Hiring a firm or consultant with a proven track record that is skilled in structuring financial processes such as Upward Insights can help you get started and/or keep on going.

Once you’ve aligned your team on this, choosing the right tool will become key in making sure the idea is actually being translated into a real process. Your accounting software (QuickBooks, Xero, etc.) or ERP (Netsuite, etc.) might be the right place to start, but many companies are still using spreadsheets to manage AR, while their volume of invoices increases. That makes it difficult to apply the guidelines stated above. If you are looking to move to the next level to manage your AR, please reach out to us, and we can help you supercharge your cash collection process and significantly improve your working capital.

Upward Insights is a consultancy that provides in-sourced finance teams to high growth businesses. They’re just as engaged as an in-house team but without the cost, training, and heavy management that’s required for an in-house accounting and finance department. Their focus is on building scalable financial infrastructures for their clients. Upward Insights also sponsors a zero to low cost solutions-driven learning platform for entrepreneurs and employees: CFOPrinciples.com 

Upflow is the leading platform for setting up and managing systematic cash collection processes. With Upflow, financial teams can measure and implement efficient processes to regain control over their receivables. Leading companies such as TripleByte and Adikteev are using Upflow to master their cash collection.