Accounts receivable represents the largest and most accessible source of non-financing cash that your company has available. In order to optimize cash flow there must be a concerted effort to manage A/R each and every day. Unfortunately, experience has proven that most managers don’t attempt to manage A/R with more than a passing thought until there is a problem with cash or a question arises regarding the validity of the recorded balances. Usually, by the time a problem is recognized, the possibility of a full recovery of the cash collection potential is remote.
Revenue without the ability to convert it to cash is of absolutely no benefit whatsoever. In fact, it’s worse than having no revenue because it will surely cost something to generate the revenue that is being wasted. Apart from cash sales, effective accounts receivable management is the means by which revenue is converted to cash. If it does not already exist, you should immediately establish a sustained effort to manage the A/R of your company. You must uncover any issues that impair your ability to collect all amounts billed and develop a plan for working through each to a successful conclusion.
It seems a brief discussion of a few underlying principals would be very helpful in shoring up the conversion process.
Bill promptly and as often as possible. Revenue is the beginning of the process. Therefore, any delay in billing produces corresponding delays in the receipt of cash. Most companies pay on their predetermined cycles (weekly, bi-weekly, monthly, etc.). It’s unrealistic to expect customers to expedite payment of your company’s invoices just because you were late in getting the invoices to them. It may happen a few times, but after a very short time your payments will be delayed until the next cycle comes around. In fact, if you’re always late and the timing is erratic, your customers will most likely place less importance on your payment because you have indicated by your action that the process is not very important to you. Project an image of consistency and urgency and people will respond.
Collect all payments as and when due. If your business requires that certain payments be made as deposits or at time of service, be certain to collect those payments. For example:
- Printing companies will often require that a large deposit be made for orders of preprinted materials.
- Medical practices that have contracts with certain payor groups will need to collect co-payments or deductibles from patients when the services are performed.
- Other companies may require that down payments be made to facilitate a financing arrangement.
If these types of payments are not collected at the appropriate time, the odds of collecting them later are significantly reduced. If problems develop, it’s almost certain you will not collect the cash.
Eliminate all barriers to payment at the outset. Make certain you have the appropriate agreement for the terms of the sale BEFORE you provide the service or deliver the product. Get the appropriate documents signed and the necessary approvals confirmed.
Provide all documentation necessary to facilitate payment at the beginning of the process. It’s very unlikely that you will be paid without a full explanation of the charges and sufficient information to support that explanation. For example, unless a medical practice provides full documentation that corresponds directly to the billing codes entered in the correct boxes on the right forms, they will not get paid, period. There is no discussion or appeal. In fact, the payor has the right to adjust the payment according to their interpretation of the information provided. Why leave that decision to someone who benefits from paying you less money? What information is required to support your charges?
Aggressively follow up on overdue invoices. Although some companies and individuals will pay without prompting, there are many that will be less concerned about a vendor that is not interested enough to call and ask for the check. Often, all that’s needed is a call to ask for an update on the timing of the payment. Other times, you will need to take a firm stand and demand the payment be made. Unfortunately, you have to be willing to be tough when necessary. Otherwise, people will take advantage of you.
DO NOT work only the old accounts. A balanced approach is absolutely necessary. If the focus is only on the older accounts, you ensure that you will always have older accounts. You must work the more current accounts in order to collect them before they become “old.”
Stay on top of the situation. The fact is that the longer you wait, the more unlikely it is that you will collect the full amount that has been invoiced.
Who would you pay first…, a vendor who is sending invoices on a consistent schedule with full supporting documentation and is very diligent in contacting you to determine the status of a timely payment or a company that sends invoices from time to time with little explanation and no follow up?
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