So, can we talk about how great it is to get paid? And when it’s on time, too? It can make your whole weekend and might take you from one mimosa to a carafe at brunch. But when the brunch buzz wears off, the question arises: Why does it take so long in the first place? Let’s go over how to know if your receivables need some attention and what can be done to improve collection time. There’s some luck involved, and at times an awkward conversation, but prompt payment is attainable.
The Metrics
Knowing your company’s history in receiving payments is essential in improving collections. Once you know, you can consider options for improving and ask yourself questions like: Should payment terms be adjusted for more significant balances? Is invoice delivery and receipt consistent? What about discounts for early payment? Knowing how to structure the payment collections process can improve cash flow, reduce expenses, and promote growth/efficiency in your day-to-day operations. Accounts Receivable Turnover and Days Sales Outstanding are universal metrics for measuring your financial health.
Acccounts Receivable Turnover
How to calculate: Net sales / Average Accounts Receivable
What it means: This calculation determines how many times collections are made in any given period.
Days Sales Outstanding
How to calculate: 365 days / Accounts Receivable Turnover
What it means: You now have the average number of days it takes to collect on a receivable. Maybe this shows that 30-day payment terms are not consistently enforced. Or maybe you notice your inflows aren’t aligned with your outflows. For example, say you collect receivables in 45 days, but bills are always paid within 30 days. Where do those additional 15 days leave you interms of cash flow? Maybe you handle those 15 days with a credit card you incur interest on, or maybe you utilize a line of credit from time to time. Reducing collection time could mean not incurring unnecessary interest charges in the ordinary course of business.
CRMs
Now that you’re a pro at calculating a receivables turnover, let’s talk about the next steps. Maybe you’ve heard the term Customer Relationship Management, also known as CRM? Most people think “software” when they hear CRM, but let’s remember the purpose this software is meant to serve — managing customers. Implementing a solution that tracks one of the fundamental aspects of your business eases the pressure to maintain records, and almost always provides for immediate improvement in receivable collections.
CRMs can come in many forms, from spreadsheets to highly integrated and customized software. The beauty of many CRM offerings is that they can be scaled based on the needs of both the user and the customer. Many CRMs function as a payment portal as well, which reduces the collection time by removing the lag time caused by outdated payment processes (still receiving checks, anyone?). Some notable CRMs on the market are:
Bill.com — Track sent status, customize invoice templates, connect with most accounting software (works best with QuickBooks Online), and much more. It is a one-stop-shop. Within invoices sent to the customer, you can include a link to the payment portal and reduce the hassle of monitoring or tracking the status of a payment. If your sales are recurring in nature, you can use a “recurring” invoice function and send out all invoices to customers with just a couple of clicks.
Zoho — With varying levels of subscription, Zoho offers a platform to manage customer feedback, social media, and marketing. Depending on the subscription level, access to some automation may become available, such as workflow templates and mass emails.
AgileCRM — A software that is free for up to 10 users and 1,000 contacts, AgileCRM is an excellent introduction to a CRM for start-ups. It can be used to track active leads, new contacts, and unopened emails. The downside? You can’t get rid of the branding from emails, so all correspondence with the customer will have an “AgileCRM” logo on it.
As we continue to move towards more cloud-based and remote operations, it’s important to maintain records in a place that is accessible to your team. Improving cash flow is also important (maybe more important than accessible records), so now might be the best time to consider a new CRM solution. Picking the right CRM for your business can be tricky, and we’re here to help. Schedule a free consultation from the link on our homepage to connect with us.
