Introduction

In my years of working as a consultant to businesses, both large and small, and as a CFO for a few organizations, I have noticed that significant overdue receivables are a serious annoyance for entrepreneurs and founders, but they are easily manageable.

As an auditor, I have proposed many adjustments as bad debt allowances. While this may seem like an easy thing to undertake as an outsider, these changes represent actual money that could have helped a business thrive.

Several small businesses are fortunate to have cash-based terms, but the reality is that for most firms, particularly those engaging in B2B activities, credit terms are unavoidable.

Customers may not pay their invoices for a variety of reasons, but in my experience, the most common reason is customer discontent. When a customer believes they have not received value from a product or service, they are less inclined to pay invoices, even if they can do so.

When delayed receivables are large in a small business, it tends to pose the following concerns for the owners:

• Inefficient use of time, energy, and other financial resources in the pursuit of receivables

• A loss of goodwill with a customer

• It also mandates the use of loans to support operations.

• A probable cash shortfall and the problems that it entails

The list above is not exhaustive, but the overall concept is that dealing with bad or overdue receivables can cause a lot of negative energy, which can have a major influence on a business’s management and staff. There are so many intangibles that determining the exact cost of the consequences is challenging, but it is frequently higher than entrepreneurs expect.

How to Manage the Process Effectively

Focus on Product/Service Delivery Quality:

This should be obvious. When there is a strong focus on delivering high-quality products or services, the customer will pay on time nine times out of ten. In your company, emphasize the importance of getting it right the first time. The possibility of rework should be strongly discouraged. If rework is required, it should be prioritized to guarantee that the customer is satisfied. Work directly with the customer whenever feasible and have them sign off on every key step and/or at handover to have documentary verification of quality delivery.

Invoice Properly and Accurately:

When dealing with some organizations, particularly large ones, simply delivering the goods or services is insufficient; a formal invoice must accompany the operation. I have seen several small businesses lose money because they failed to invoice or had invoices with incorrect information. Their books will show that there is a payment due, while the customer’s books will show no such amount due. As a result, fast and correct invoicing is critical. Attaching the customer’s signature collected in step 1 to the invoice is a useful suggestion.

Use Proper Accounting Techniques:

On my first day at one of the companies I worked for, I checked the receivables balance and discovered that it was over a billion naira, with most of it more than 360 days old. The number of receivables was exaggerated due to a strange combination of faulty accounting methods and incorrect recordkeeping. Sales orders, for example, were classified as invoices, and payments were not properly applied. It is much easier to monitor and follow up when appropriate accounting practices are employed.

Regularly monitor:

Surprisingly, this is one of the most neglected aspects of the receivables process. Salespeople are wired to close a transaction and move on to the next one, whereas accountants may record invoices but may not have enough direct contact with customers to assure payments, allowing proper monitoring to fall through the cracks. As an entrepreneur, be sure that someone in your company oversees monitoring receivables, especially as they come due. The individual will oversee contacting customers to ensure their satisfaction, reconciling invoices, and staying on top of things before they get out of hand. This person should preferably be customer-facing.

Examine and Distribute Credit Risk:

Regardless of how small your company is, it is vital to objectively assess the risk of dealing with credit consumers. Determine whether your company is willing to take the risk of dealing with the possible trouble of pursuing down invoice payments. Or whether your company can only accept cash. While it may be more difficult for small firms, diversifying the customer base is a smart idea because attaching all sales to one client may spell doom in the event of a default.

Build and maintain relationships:

Businesses should strive to develop strong relationships that go beyond transactional operations. Many clients enjoy these ties and regard them as the additional value provided to them. This may result in certain providers’ invoices being paid ahead of others. Take the time to speak with them and learn how you can assist them in areas other than the sale. With this method, I have a high collection rate.

Negotiate:

Be prepared to negotiate payment conditions such as discounts, instalments, incentives, and so on. You may need to recognize that some non-paying clients may be experiencing cash flow challenges and that making constant calls or visits, or even threatening legal action, may be futile. The contacts you have already established in Point Six above should assist you in determining your customer’s financial situation. By providing some form of respite, the client is more inclined to settle past-due debts to maintain the relationship.

Formalize everything:

I cannot emphasize this enough, particularly for small firms and start-ups. Contracts, sales orders, invoices, and other sales documents are all examples of sales documentation. Do not presume that the other person intends to treat you fairly. Internally, formalize the sales and receivables processes as well. It teaches you how to handle invoicing and subsequent collections.

Conclusion

There are additional strategies to help manage high late receivables, but all it takes is some planning, diplomacy, and diligent follow-up.

Do you have any trouble with receivables collection? Or do you require assistance in establishing a sound collection process? Please let us know how we can assist you.