How to Improve Collections During the COVID-19 Crisis
For any startup or growing business, having enough cash to pay suppliers, employees, landlords, and service providers, is essential for its health and longevity. Collections process efficiency is vital at this time. In addition, creating a cushion, or cash reserves can carry many startups through down cycles, or tough times, including today’s COVID-19 crisis.
Efficient Collections Policies & Procedures
Many young companies do not take the time to set up efficient collections policies and procedures. Then they resign themselves to receiving payments when their customers and clients are good and ready, rather than strictly, but professionally, enforcing the terms of the contract. This “extension” of receipts diminishes the company’s cash position at any given time, which may lead to the inability to meet a variety of financial obligations.
To improve cash flow, one of the best places to start is through tightening up your collections process by:
- producing and sending invoices quickly,
- incorporating financial incentives for prompt payment like establishing a scripted escalation process,
- creating easy payment options,
- and knowing when to let go.
Let’s start with the obvious- all things considered, the faster you invoice, the quicker you will get paid. Start with streamlining the invoice process by producing invoices daily and by having clearly defined roles and responsibilities. Sending invoices by email via your accounting software (Quickbooks Online, Xero, Bill.com, Intacct, and Netsuite all have this functionality) also helps speed up this process.
Ever wish you could provide a simple incentive for your clients/customers to pay promptly? You can! Include in your contract a late fee/finance charge that will be assessed to outstanding invoices. Most companies don’t want to deal with an increasing bill, and the threat of additional fees is often the tipping point to get them to pay.
Establishing an escalation process is another useful tool to keep a short leash on late payers. Having a scripted routine you rely on can make a huge difference. However, for the script to be effective, your accounting department must post all payments (either by mailed check, ACH, or wire) the same day; otherwise, you run the risk of asking for money that has already been paid. An example script might include a polite reminder email at +5 days due, followed by another more stern (but professional) email pointing out an impending finance charge at +10 days due, an additional email adding in the need to pause work or service (possibly accompanied by a phone call) at +30 days due, and the need to turn over to a collection agency if over +60 days due. If you have limited accounting resources, prioritize your most significant invoices then the latest past due. And of course, the correct cadence always needs to be customized to best suit your clientele, adding in a healthy dose of flexibility for unforeseen circumstances that might have affected the receipt of payment.
Making client/customer payments simple and easy can also help your collections efforts. Most software used to process invoices can add the option to be paid via ACH, or even by credit card (keep in mind credit card fees can be a bit high). By adding an ACH or credit card link to your invoices, you will not only speed up your collections process; you will simplify your accounting as most software also includes automatic matching to your outstanding AR.
Know When to Let Go
Finally, know when to let go. Unfortunately, some customers/clients just will not pay - ever. Realize when your efforts have reached a stage of diminishing returns, and write it off as bad debt or sell the AR to a collection agency. Releasing this energy and re-focusing on clients with the potential to pay is a difficult but necessary step forward.
Burkland offers expert CFO services, accounting services, and tax services to startups across the USA. Please reach out to us to learn more about what we can do for you, or if you have questions about federal, state, and local resources available in response to the COVID-19 outbreak.