How to Achieve Cash Collection Excellence for your Business
Apr 18, 2023
“Few companies are lucky enough to use their own product every day.” At Upflow, we do. Our “Ideal Customer” (or ICP) is close to who we are as a team, and that’s something we value a lot as we build our product. We sell to finance teams, and our own finance team sits right in the middle of our product managers and engineers. They are the first to make recommendations for new features, and they request new features from our product managers every week.
During our product sprint demos, they are even more excited than the sales team when seeing their deals unlocked with newly shipped features. Clément, our Finance Manager, was one of our first beta user at his previous company. He was the early adopter every founder dreams about, using our at the time broken product with a smile and giving you actionable feedback for improvement. He’s now part of the team. How could it get any better for our product team?
As a fast-growing business selling software in different segments and geographies, cash collection became part of the game here at Upflow. It was clear we would build an AAA cash collection machine. We’ve tried, failed, and iterated numerous times to get to new cash collection heights.
Many finance teams have asked us “how do you set up the right cash collection process?” So here we are! Read on to learn the steps to set up a rock-solid collection process to achieve cash collection excellence for your business.
Set cash collection as a strategic corporate priority
First things first, you need to make sure cash collection is a priority for your business and set high-level objectives. Here at Upflow, the founders and board of directors have clearly identified cash collection as a strategic priority. MRR (monthly recurring revenues, see below) is our North Star Metric, but our cash collection ratio is our next top priority.
Why should it be a priority?
If you’re a traditional company operating on thin margins or a bootstrapped startup, then cash coming from operations every month is absolutely critical for your short-term survival.
If you’re a VC-funded startup and raised millions in venture capital, you’re probably keeping a close eye on your runway. It goes without saying that cash collection performance has a significant impact on runway.
In a nutshell, for any type of business, signing deals and reporting “numbers” is great, but turning those numbers into cash is even better. So you need to keep an eye on both.
This objective becomes a clear priority in our OKR process, and is embedded into our day-to-day reporting. How do we do this? With clear target setting and communication.
Setting ambitious cash collection targets and overcommunicating about it
Here at Upflow, we transparently communicate to our team members our key performance indicators in real-time. We operate on a subscription model, and our North Star metric is our MRR, or “monthly recurring revenue” that are contracted with our clients through subscriptions. It’s an important KPI for us because it reflects how we create value: we’re a pure B2B SaaS player, and our revenue yield a very healthy 90%+ gross margin. Hence, MRR should translate into solid cash flow generated.
Therefore, on a weekly basis, we communicate our MRR and the collected amount, or cash collection ratio to the entire team.
The cash collection ratio represents the percentage of revenue (MRR) that you were able to collect during a period. It is calculated by dividing the amount collected in the period by the previous month's MRR. Setting a clear, key collection goal of at least 100% (ideally more) of MRR will help you track progress and stay on track.
This ratio seems quite straightforward, right? $10,000 of “contracted” monthly recurring revenues of subscriptions should generate $10,000 cash collected on our bank account every month, and your cash collection ratio should be 100%. Easy? Well, not that easy. For those who fancy accounting, that’s similar to the difference between the Profit and Loss (P&L) and cash flow statement. The former is theoretical, the latter is very real for your bank account.
Here is what can make cash collected from operations more important than your MRR:
Billing and collecting additional fees or services that are not recurring revenues, for example, set-up fees, or overage fees.
Collecting upfront annual payment, when you manage to collect the total annual value of the contract in advance, 12 months in one lump sum. Kling kling!
On the negative side,your monthly cash collection ratio can be negatively impacted by the following:
Annual prepaid contracts that have already been paid in previous months.
Payment terms creating a 30/60/90 day offset between revenue recognition and cash collected.
Disputes with customers who don’t want to pay you right on time, or don’t want to pay you at all.
Short-term discounts to reported MRR and other “paused subscriptions”
And of course… late payments from your customers.
Following Jason’s advice (link), we have set a 110% MRR cash collection target. Simply put, our goal in month N is to collect 120% of the MRR recorded in month N-1. At the beginning of every month, we communicate the target, and every week, we report on the progress made, to everyone working at the company.
We’ve now understood the concept and have set the targets. Now, how do we make it happen? Let’s dive in.
Cash collection is a team effort, and pretty much everyone is involved
Finance owns cash collection
Our most frequently asked question from business teams is: who’s responsible for cash collection? The sales or account management (success) teams are sometimes candidates, but everyone agrees it’s “not their job to chase unpaid invoices”. Fair enough. Here at Upflow, the finance team owns cash collection. This does not mean that they will perform all collection tasks, but rather because ultimately reporting revenues and collecting cash is a finance duty. But as we often say here at Upflow, “owning doesn’t mean doing everything”. Our small but mighty team is responsible for cash collection, but they’re not alone when it comes to bringing our cash home.
What does finance do?
They design the cash collection processes and typically set the workflows, motions, and cash collection rhythmic.
They measure and report cash collection, and often report progress in our Monday all-hands meetings.
They are the ones to reach out to customers in the first place, making sure that billing is correct, send invoices out at the right time, ensure their deliverability, and send the bulk of the first reminders, when needed.
They manage technical issues relating to cross-border payments.
They act as a first line of communication with customers to identify commercial issues.
They perform the cash application process and maintain the general accounting ledger up to date. At Upflow, we use Netsuite as an accounting software, for our two legal entities, in the US and in France.
When needed, they also put on their legal hat to enforce collections. Fortunately, this doesn’t happen very often.
A workflow is a structured list of automatic or manual actions to be performed, as invoices become overdue. It has a target date (before or after the invoice due date), an owner (finance, sales, account manager) and a type (email, call, letter, SMS).
Finance is not only running the process, they also regularly communicate about the status and results of collected cash. Below is an example of the weekly cash collection digest sent by Clément to our team on Slack, using the Upflow integration.
In other words, Finance does the heavy lifting of cash collection. The question then becomes, what are the other teams doing to assist them?
Sales are involved in closing the deal and sending the first invoice only
Closing the deal
Usually, when you pronounce the two words “cash collection” to a sales team, they usually start screaming saying very vocally that their job is to close new business, not to chase unpaid invoices. Here is an example:
You get a point, dear account executive. That being said, closing deals without collecting cash is not very effective for your company. From our experience, we know that collecting the right details upon the deal closing is key to a smooth payment process later down the line. We also know that for new customers, the first invoice is usually the most difficult to collect. Indeed, they need to create a new vendor in their system, input new payment details, and find who is responsible for this new vendor internally. That’s why it’s so important that our salespeople get this right when they close their deal before it’s too late.
Our sales team are therefore asked to collect a few details upon closing their deals. Those include:
The signed contract in the right system, in order for the finance team to be able to refer to this later, in case of an issue. At Upflow, we’ve automated that step through an integration between Pandadoc (electronic signature of order forms) and Salesforce (our CRM, our source of truth for contracts).
The right legal details for the billed entity, which should be in the contract or the order form. These should be up to date in Salesforce.
The right subscription information is entered into our CRM (Salesforce) and/or our subscription management tool (Chargebee). Again, we’ve automated this step as much as possible, with a catalog of subscriptions made available in Salesforce, directly pushed into Chargebee, our billing system.
The right payment method is selected for this customer. At Upflow, “pull” payment methods (credit card on file or direct debit) are the default payment methods, as described in this article. As such, ACH mandates are sent out together with the signature of the order form.
The detailed instructions to the finance team on when and how the first invoice should be raised and paid. There is nothing worse than a first invoice not corresponding to what was agreed, right?
The right contact with the accounts payable (AP) team of the new customer. How many first invoices land in the wrong inboxes?
The Purchase Order (or PO) number, if needed.
Again we leverage a lot of automation in this process, and we’ve configured Salesforce so that deals can’t be closed without those details being properly inputed. Missing info = no closing = no numbers on the board = no gong on the sales floor! At first it can seem harsh, but with a bit of pedagogy and time, it will soon be embedded in your processes.
Sending the first invoice
Once the deal is closed, the new customer is onboarded by our success team. Whenever it’s due, the first invoice will be prepared by the finance team. However, this first invoice will not be sent by the finance, but rather by the salesperson who closed the deal. With this, the sales rep has the ability to review the invoice to make sure it’s in line with the process and send it with a personal touch, acting in seamless continuity from the initial sales process. They use the feature “Send invoice from Upflow” which allows for the invoice to be prepared from Netsuite, but sent from Upflow, with the required level of personalization. The customer has already been introduced to the onboarding team, and the salesperson is able to nicely close this loop. Thanks to this seamless handover, our Customers are happy, and we’re all incentivized to a good start on Upflow.
After a couple of days, once the first payment is received, a Slack notification is sent to the salesperson congratulating them on the first payment received. Hard work pays off! At the same time, our internal workflows are automatically assigned back to the financing team, and the salesperson can go back to closing new business. Onwards!
From there, the finance team runs most of the show
As described above, after the first invoice is paid the finance team runs the show. We have specific workflows dedicated to different audiences of customers, depending on their language, their tier, and their payment method. It’s quite sophisticated in terms of process, but one thing to remember: nothing falls through the cracks. Once an invoice is done, it’s either going to be paid or worked on. In short, it is never forgotten.
A default workflow, showing a mix of automated and pre-configured manual reminders, distributed across different teams. Different types of customers will get different workflows, tailored to their audiences (language, payment method, type of customers, etc.).
As of March 23, we have more than 20 different workflows depending on customers' typologies.
Account managers are involved, only when needed
At Upflow, we want every team member to remember that closing a deal is not the end of the game. Turning a new customer into a long-lasting happy customer is the goal, and usually happy customers pay their bills on time.
Whenever finance has an issue with cash collection with a specific customer, they quickly escalate this to the main internal point of contact at Upflow: the account manager. Similar to sales, account managers are not responsible for cash collection, but they are likely to know any underlying issue with this customer, if any.
There are two main ways of involving account managers:
Systematically, as part of the workflows. Finance can only do so much! After two unpaid invoice reminders, the account manager is cc’d on the third reminder. If the invoice remains unpaid, the account manager is responsible for performing the 4th reminder directly, usually via a call.
Ad hoc, when needed. Whenever needed, the finance team can tag an account manager (or anyone else) to enquire about this specific account.
An example of an internal discussion, where the finance team is the account manager Emma more information about this account. The timeline keeps track of all conversations with this customer, to foster better collaboration.
Whenever an Account Manager needs to be involved, the task is created in Upflow, but they are notified in Salesforce (where they spend most of their time) and in Slack. When they will perform that task, they will also have access to the timeline, showing them all previous communications with this customer. Context is helpful!
Incentives for our business team
As explained above, Sales and Account Managers don’t own global cash collection, as they’re not incentivized on the global achievement. Finance is! However, they can have a significant impact.
As we started growing our business, thanks to detailed analytics, we realized that two key points had a significant impact on our cash collection: 1. payment method on file and 2. annual upfront payments.
“Payment methods on file” means that whenever we sign a new contract, we require a “pull” payment method to be able to charge the customer upon the invoice due date. For example, a stored credit card or a direct debit mandate are pull payment methods. This is embedded into our legal agreement, but the annual upfront payment is more of a commercial trade-off. As such, in 2022 we rolled out an incentive program for our business team: we give them a one-off additional small bonus (once the cash is collected), anytime they either a. close a deal with an upfront payment or b. manage to convert a monthly subscription into an annual one. If you’re interested to know how we designed that incentive, please reach out.
This incentive, albeit quite small in $ value, had a significant impact on our cash collection rate. That’s an easy win to celebrate. Every business is different, so you’ll need to find the incentive that works for yours, but keep that in mind: incentivizing in a smart way can drive great outcomes.
C-Levels and executives are also part of the process
Executives are too often disconnected from the cash collection process. Not at Upflow! If we decide that it’s a strategic topic, then they also need to be involved.
First, C-levels consume our cash collection performance analytics, via aggregated dashboards, usually at the consolidated level, as we have multiple entities collecting cash. CFOs and CEOs can often tell the direction of a business by looking only at a few metrics. Here, the trends in the cash collection ratio and the CEI index are strong indicators of business performance. They are scrutinized, on a weekly basis.
CEI and Cash collection ratios are key indicators.
From time to time, C-Level can also be involved in cash collection for strategic accounts. When all other processes have shown no results, and when the account is a strategic one, the finance team can reach out to the leadership team for help. They all have real-time context already loaded in Upflow via the timeline and can make a thoughtful reach out to the company. When the CEO picks up the phone to call the customer CEO to enquire about an issue, you can quickly find out the problem!
Business operations support the entire process
As you can tell, when you have hundreds of customers, managing this process can become quite complex. And if you build an amazing process on slides but no one can use it, it’s worth nothing.
That’s why we not only use our own product but also rely on our business operations team to make sure that all the other pieces of the puzzle are seamlessly working together. Billing, accounting, payment gateways, CRM: all those tools need to be properly configured, and connected and to work together perfectly.
Our business operations team has the mandate to help scale our business processes at Upflow and in this case, that means that cash collection needs to be:
Scalable: Cash collection processes need to work now, but also in 2-year’s time, as we keep on growing fast.
Interconnected and simple: We want to minimize manual work and make sure that everyone can keep their own tool. That’s why they are integrated into our stack as follows: Salesforce > Chargebee > Netsuite <> Upflow <> Stripe.
Automate as much as you can, or at least make sure the process is not a burden to your team. If you try to roll out a clunky process relying on outdated spreadsheets and terrible “bad payers meetings” that no one wants to go to, there’s little chance you’re going to improve your cash collection.
Celebrate the successes
Last but not least, it’s important to celebrate the wins. At Upflow, we bring technology to companies to turn cash collection into a cutting-edge process, and elevate them to cash flow excellence. We frame it as a positive outcome, not a negative one. Unfortunately, too often, cash collection is associated with negative messages. The first thing that comes to mind is “late payment” “bad payers” and “unpaid invoices” :( But don’t forget that most of your customers want to pay you, otherwise your company wouldn’t be in business, so don’t get into that negative state of mind. Take the time to celebrate the wins, both big and small.
Because finance owns the process, they are also responsible for communicating the good news to the wider team. Here are simple examples that work to focus on the positives:
Payment received: Every time an invoice larger than $1k is paid, the account manager is notified in real-time via a Slack message. That’s a small win, but a positive message for the team!
Weekly cash collection digests: They are a great way to share progress made against the targets: we also share them on Slack, in a public #cashcollection channel.
Best account manager: Nominate publicly the account manager with the best cash collection ratio for the month during your monthly review, alongside the best salesperson. She will see that deal closing is not the only thing that is important.
Typically, we also reinforce this messaging, when we organize our quarterly company retros, cash collection is presented right after the budget progress. Not in buried in the appendix.
Now, it’s your turn to implement a robust cash collection process with your team
We hope these practical examples have been helpful! This is how we operate at Upflow, with an obvious cash collection bias, but it is still worth sharing. Overall, we believe that cash collection is still too low of a priority for many businesses, and it shouldn't be. We hope that these practical examples can help you implement better processes, enabling you to rally your team around improving your cash flows and save time through streamlined procedures.
Keep in mind that some aspects may or may not be applicable to your organization depending on its existing order-to-cash process, or if you are on a different scale. If you’re a much smaller or much larger organization, things may differ. But the general principles will probably remain the same!
Many companies don’t know how to organize their cash collection process and who should own it. Here are our recommendations:
Make cash collection a strategic priority for your company, with clear goals, and communicate regularly about it
Finance should own cash collection
All other teams (sales, account managers, executives) should collaborate when needed
Don’t underestimate the tooling and implementation, to make your ideal process an operational reality
Set some incentives for your team to achieve their cash collection goals
Cash collection is often associated with negative messages. Instead, celebrate the wins to instill a positive culture around it