The Challenges of Prompt Debt Collection
If you're not happy with just maintaining your company's status quo, it's only a matter of time before you realize that to achieve your growth-oriented goals, you need to increase your cash flow. To grow your company requires an investment that quickly consumes available capital and puts a strain on your cash flow. The challenges that growth presents also quickly turn into a difficult to manage snowball. As the size of your operation increases, so too do your ongoing staffing costs. Considering how the costs of your receivables will increase as the rest of your operation scales up is an important factor that also should not be overlooked.
Growth is defined differently by flash-in-the pan successes than by those managers and business owners who are capable of engineering one of the most difficult to achieve goals in business: long-term, sustainable growth.
A well placed marketing campaign or infusion of cash can make almost any venture's gross sales shoot up. However, creating a model that provides sustainable growth and increasing profits over the long term is much more difficult to do.
Understanding the DSO ratio is a critical factor for anyone trying to create a workable, long-term model for growth. For those unfamiliar, DSO is a measure of how many days sales are outstanding. If you can't reliably ensure a consistent income stream, especially when trying to navigate growth for your business, you could quickly find yourself in a constricted cash flow scenario that can make operations very difficult, keep a wary eye on your DSO. As sales start to increase, it can become difficult to keep pace with increasing costs if it starts taking longer to collect on outstanding debts. It is also important to not let outstanding invoices get overlooked, because collection becomes more difficult and less likely with each day that passes. It is also important to carefully judge your requirements for extending purchasing power to customers. Decreasing your qualifying requirements might seem wise, but if it takes too long or costs too much to recover your debts, such a move can leave you further behind than when you started.
Aim to have all bills paid within 60 days. That keeps a consistent flow of incoming cash and prevents collections from becoming a problematic issue for your company. Follow these tips to further ensure that your company can grow by ensuring reliable income.
Promote Early Payment
Too many companies build their collection policies around the idea of punishment. People who are late on their bills will be punished by having delinquent fees added to their invoice. This can create bad blood with customers who are late, and can even deter people to the point of default. Instead, consider how you can use an incentive program to encourage early payment of invoices. A slight discount for early payment can bring money in on time while also creating customers who are happy that they could save a few dollars.
Evaluate Your Credit Offerings
First of all, if you can avoid extending credit you can eliminate a lot of collection problems out of the gate. If your company works in an industry where that is not an option however, the establishment of firm standards and thresholds that must be met can avoid collection difficulties down the road. Decide what credit standards you need to hold customers to, and then enforce those policies. Working with a factoring company can be an effective way to assess the credit risks new clients may pose.
Efficient Billing, Efficient Payment
Don't forget that the faster you invoice your customers, the faster they can make payment. A delay in the billing process also separates the customer from the immediacy of the purchase, which makes payment much easier to overlook.
Having efficient payment processing plans is also important. Customers today want convenience in all things, so you shouldn't make them jump through hoops just to pay their bills. Accepting credit cards and electronic means of payment helps make it easy for your customers to pay. Just like any aspect of your business, if you make it easier for a customer to do something, they are more likely to do it.
Up Front Payment Terms
Finally, don't be coy when it comes to when defining when you expect payment to be made on your invoices. This can easily lead to misunderstandings and overlooked payments. When issuing an invoice, clearly state how many days the customer has to pay while also outlining any incentives you may have out into place if they choose to clear their invoice early.
Putting a combination of these concepts and practices into effect at your organization can yield real change. Decreased costs in your receivables department and more reliable infusions of cash are a recipe for sustainable success.
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Author: Hudson Piccini
Hudson Cynar, a Harvard University alumna and the owner of three prosperous enterprises, is a distinguished business consultant, author, and writer. Her expertise spans multiple business sectors, with a particular emphasis on storage containers, commercial copiers, payroll services, and medical billing software. Dedicatedly investing thousands of hours into product and service research, Hudson crafts insightful reviews to guide entrepreneurs in making informed decisions for their businesses.