Cash collection is a tedious and sensitive business process. It’s a major concern to business owners, as a slight inefficiency could ruin a relationship with a customer or lead to writing off bad debts.
As an essential part of the order-to-cash cycle (OTC, or O2C), cash collection is vital for business solvency and growth. Plus, investors use solvency as an essential metric for measuring the financial health of a business.
This article will guide you to set up an efficient cash collection process, thereby helping you avoid insolvency and further disruptions in your business process. But what exactly does a cash collection process entail? Let’s find out.
What is the Cash Collection Process?
Cash collection process is the steps you take to retrieve cash from businesses and individuals whom you’ve issued an invoice. The OTC cycle isn’t complete if the invoice is not redeemed.
The OTC cycle entails order application and processing, order shipping and invoice creation, and cash collection and payment recording. You can see how vital the cash collection process is to business operations and cash flow.
It requires careful, efficient measures to ensure the business collects its due balance without ruining its relationships with customers.
Steps to Setting Up an Efficient Cash Collection Process
To avoid cash flow problems which could lead to business insolvency and eventually bankruptcy, follow these steps to set up an efficient cash collection process:
1. Analyze and Categorize Your Account Receivables
Analyze your account receivables and categorize them according to the time they’re due. Account receivables are the money due to your business for goods and services delivered to your customers on credit.
Categorizing them according to the time they are due makes it easier to implement efficient cash collection strategies. Each account will fall into one of three categories: the near due date accounts, newly past due accounts and past due accounts beyond 30 days.
Analyze each account, study their payment history, and identify those who are less likely to pay you in due time. Separate them from the rest and identify the cash collection strategy that suits them best. This will lead you to set up a cash collection system that works for each category.
2. Develop a Cash Collection System
Developing a cash collection system ensures your unpaid invoices are greatly reduced, and your business process is improved. However, for efficiency, you need to set up different cash collection systems for the different categories. This is because, while some people would require constant reminders, others only need a nudge to make their payments.
A well-developed system enables your team or employees to know when to initiate cash collection communications and how frequently they should follow it up. When should invoices be sent? At what time do you remind your customers that their payment is near due? How frequently should you remind them of their due payment? And what should be done when payments are past due?
These and many more are questions you should ask when setting up a cash collection system for any category.
3. Send a Detailed Invoice
Once you’ve categorized your account receivables and developed a cash collection system, focus on the details of your invoice. Use a customer’s invoicing requirements to provide all the relevant information regarding their order.
It’d be difficult to recover payment from some individuals or companies if you don’t include all the necessary information. Details like the unique identification number, invoice date, payment instructions and terms, business contact information, and the description of the goods or services are essential information that shouldn’t be left out of an invoice. All these are needed to make it easy for a customer to redeem his invoice as soon as possible.
4. Set Up Multiple Payment Systems
Sometimes, having multiple payment systems could be all you need to avoid the cash collection disruptions your business encounters. Businesses have different payment systems that are more convenient for them than others. Some prefer issuing checks, while others find it easier to use PayPal, ACH, credit cards, wire transfers, and many more.
Find the payment system that suits each of your customers and incorporate it. This will reduce your cash collection backlogs and increase your cash flow accordingly, as companies and individuals will easily process payments because there’s surely a system that’s very convenient for them.
5. Automate Your Cash Collection process
Every successful entrepreneur can tell you a lot about how automation has helped their business operations. Your cash collection process would surely be easier and more efficient if you automated it. Customers want to be reminded about payments. Leaving it to your team to manually communicate with your customers would result in less productive output.
Using cash collection software ensures your customers receive reminders and make their payments on time. It also affords your team more time to handle other hands-on issues preventing your customers from paying on time.
6. Prioritize Your Cash Collections
Though automation is essential for retrieving due debts from customers, not all customers heed automated messages. There are some customers that won’t bulge until they get collection calls. Now, depending on their number, prioritization will help you achieve the best result.
It’s always best to attend to the largest accounts first, as even a little progress made there can influence your cash flow greatly. Once all the large accounts are sorted out, you might want to proceed to the riskiest and oldest accounts before moving on to less risky and small accounts. Cash collection prioritization is an important strategy every business owner uses to combat insolvency.
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Strategies to Make Your Cash Collection Process Yield Better Results
Personalize Your Messages
When sending out cash collection messages, personalization is key. It tells each customer that you’re addressing him directly, and it creates a sense of responsibility in them. A personalized reminder or notification takes into account the variations in the cause of late payments from each customer. Personalization also ensures the notification reaches the customers at the right time by taking note of time zone differences.
Ultimately, personalization improves the response rate from your customers, which would lead to more communication on how unpaid invoice issues can be resolved.
Make it a Team Work
Bringing cash into the business is a team work. No other arm of the business would exist if the company is insolvent or bankrupt. So, it is the responsibility of everyone in the company to ensure there’s enough cash flow for business growth and expansion.
The sales team, marketing team, finance, and administration should all contribute towards recovering the unpaid debts of the business.
Use Multiple Channels
Every communication channel available should be used in the cash collection process. Emails, calls, texts, letters, and every other means that’s convenient to the customer can be used.
It’s also important to ensure you’re talking to the right person (the decision maker for the company). This will make the cash collection process more efficient.
Conclusion
The growth of every business depends on its ability to manage and use cash flows for business development processes. Cash collection is an important process in ensuring there’s enough cash flow for a business to build and grow. With an efficient account receivables software and a dedicated team, your cash collection process will yield massive results.
Hopefully, this article has provided you with the information you need to effectively manage cash flow and take your business to the global stage.
