1. Curb outstanding accounts receivable upfront with payment terms
If there are more outstanding receivables than you could manage, getting to the root of this problem and mitigating it is a better strategy than blindly chasing after invoices. In many instances, you need to go back all the way to the beginning when sales are made.
In various textile companies, following credit and accounts receivable policies is a matter of culture. In sales-driven businesses, it is not rare to extend credit to customers regardless of their solvency, or to override credit limits or payment terms to secure deals. To improve your company's cash position while taking its commercial goals into account, you will need to work together with sales to agree on payment terms that both work for your customers and lower your financial risk as much as possible.
Depending on your company's circumstances, you can set several or all of the following terms to aid your order to cash cycle.
- Adjust your payment terms to reflect your customers' payment practices and your accounts receivable capacity. Shorten your payment terms if your customers are in the habit of paying late and it is challenging to send them reminders before the due dates. Lengthen your payment terms if you receive guarantees of when your customers will pay. Another important point is to make your payment terms explicit and consistent in all documents, such as contracts, terms and conditions, and invoices.
- Offer alternative payment forms that lessen the risk of non-payment and its repercussions. Milestone payments are suited for deals that span a long period of time. Down payments, typically paying half of a contract's value when the deal is closed and the other half when the delivery is received, are usually used as good-faith payments. Credit cards can sometimes be kept on file and to be charged in case of late payments
- Offer more than one payment method for your customers' convenience. Whether it is by cheque, bank transfer, or online payment, your customers have their preferred payment options and are more willing to make payment in those manners. It is best to conduct a survey on the most popular methods and select those that work well with your cash application.
- Provide incentives to pay early. There are companies against this, as it could lower their profit margins. There are also companies in favour of this, because for the most part, their invoices are paid without them having to pour resources into dunning their customers. To increase the likelihood that the benefits outweigh the lost revenue, you can be selective and choose to give small discounts to customers who are prone to default on payments (insolvent customers or customers with a poor payment history) to encourage them to pay promptly. The time and resources you save here would likely offset any lost margin.
- Create disincentives to deter your customers from paying late. Common examples are fines, interest charges on the outstanding amounts, discontinuation of deliveries or services, reduction or removal of credit limits, and debt recovery by a third party. There are two crucial aspects you need to cover in order to make the disincentives work. First, you need to make known the disincentives beforehand to prevent any disputes down the road. Second, you need to exact any penalties you introduced. If you are worried that some sanctions could harm the relationships with your customers, do not impose them. Opt for methods that can maintain your business relationships while recovering the outstanding invoices, such as a professional debt collections agency, instead.
As economic conditions change, your customers' payment practices alter, too. It is essential to review them on a regular basis with input from sales to ensure that your payment terms are in line with market realities. Additionally, sales should work with finance every time changes or exceptions need to be made to the payment terms. This is not to hinder sales, but to put a curb on accounts that are, temporarily or permanently, not worth selling to.