Newport Board Group, an Advisory Firm Serving Middle Market Companies, Lists 12 Steps to Successfully Collect Cash from Customers

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Accelerate Cash Collections and Reduce Debt - a Primer for Growing Companies.

Unless a business is one that can become a completely digital business, there are several steps that can be taken to significantly increase the amount and speed of customer payments while at the same time increasing customer satisfaction.

For many small and midsized companies, collecting cash on a timely basis from customers is one of the greatest challenges to the success of a company. It is often a delicate balance between maintaining good customer relationships while letting customers know that the success and continuity of the business is dependent upon getting paid in a timely fashion.

Online businesses have an advantage over traditional businesses in that payment is almost always received via credit card, PayPal, or other electronic payment methods before delivery of the goods or services.

Unless a business is one that can become a completely digital business, there are several steps that can be taken to significantly increase the amount and speed of customer payments while at the same time increasing customer satisfaction. In essence, by embracing newly developed technologies and strategies in customer “order to cash” processes, any business can emulate the payment efficiencies of web-based businesses.

The High Cost of a Bad System

Companies that bill customers for goods or services when or after the good is delivered or the service performed need to have great follow-up systems for cash collection. Poor cash-collection systems can result in:

High order-taking error rates. Did the salesperson provide the proper terms and payment agreements in the sales ordering document?

High order-fulfillment error rates. Did the production and fulfillment people get the order right?

High DSO (Days Sales Outstanding) rates. Is the customer using the company as a “bank,” delaying payments to the company and paying other vendors first?

High cost of dispute resolutions. How to play the good cop/bad cop role when it comes to collecting cash from a customer?

Inefficient/ineffective collection processes. How much is being written off on receivables that could be collected with a little creativity, or a call to the client from senior management rather than the billing department?

The result of a poor billing and collection system is long-term losses due to customers patronizing better managed companies for products or services. If the customer thinks that the billing and collection process of a company is poor, the customer will generally also have a poor impression about the rest of the organization.

Addressing Slow-Paying Customers

Let’s assume that the company's billing and collection systems and processes are just fine but the company still has too many slow-paying customers.

Where to start? Here are 12 steps to take:

1. Start by looking at how to streamline internal processes and make it easier for customers to work with the business. Is it easy to do business with the company? Is every contract negotiation a painful event for both parties?

2. Know and understand current and prospective customers and the cash flow traits of their own businesses to help reduce non-payment risk and tailor collections strategies. For example, if a subcontractor is working for a general contractor, that general contractor (and then the subcontractor) might not get paid until certain milestones are achieved.

3. Communication—both between departments and with customers—is the key to efficiency and visibility into cash flows. Move from emails to real-time data and information sharing (e.g., using a service such as Dropbox).

4. Consider what it’s like doing business with the company from the customer’s perspective. Is the company as efficient at handling the customer's business?

5. Implement or expand automation of the Order-to-Cash (O2C) cycle. Quote/ O2C normally refers to the Enterprise Resource Planning (ERP) process, that is: recieving customer sales orders via different sales channels (e.g., email, online, sales staff, fax, or by some other electronic means); fulfilling the order (including shipping and logistics), generating an customer invoice and collecting payment.

6. Standardize procedures for product or service quotation and order management. Integrate order entry, credit, billing, and collections.

7. Embrace technology - Much of the consumer sector has moved from paper checks to electronic bill pay and this trend will only continue. However, many businesses have been slow to embrace electronic payment processes. The company should be able to accelerate customer payments by incorporating technology into vendor-payment and customer-collection processes.

8. Manage event management. Does the company send out new customer shipments before payment has been received for the last shipment? The right system would “trigger” an alert, which would allow the sales and billing departments to use the potential shipment as leverage to collect the old receivable.

9. Utilize electronic interfaces to banks and customers. If the billing department is not requesting customers to pay via ACH versus a check, cash flow could be slowed by almost an additional week as the check finds its way through the customer's processes, gets signed and delivered by mail.

10. Utilize web-based and electronic sales order management applications. These are very effective as they can be used to require payment before order fulfillment.

11. Implement credit-management solutions. What is the creditworthiness of a client? Are credit terms adjusted based on the customer’s history of paying other vendors?

12. Electronic invoice presentation and payment solution. Still sending out paper bills to customers, which adds additional days of delay in getting paid?

There are many other technology-based systems that can be purchased inexpensively that would improve business processes, accelerate cash collection and improve customer service.

Examples and acronyms are:

Customer Relationship Management (CRM)
Advanced Planning and Scheduling (APS-APO)
Sales & Operations Planning (S&OP)
Procurement (Business Commerce & Cash Management)
Extended Warehouse Management (ETE execution tools)

Many businesses (and their bankers) find that businesses “grow themselves into the ground.” The faster the business grows, the more money a business needs to invest in people and inventory. If the business is not collecting money from customers quickly and efficiently, a business will be a successful business in terms of sales but a very unsuccessful business from a cash-flow perspective.

Michael Evans is the Northern California Managing Director of the Newport Board Group.

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Michael Evans
since: 04/2013
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