Your Reactive Collections Approach Doesn't Work

Happy Sunday!

This week we are going to discuss a little bit about why proactive collections is better than reactive collections. Ready? Let’s go!

The Cash Flow Cure: Why Proactive Receivables Management is Your Secret Weapon

In the whirlwind of running a business, keeping a steady stream of cash flowing can feel like an ongoing battle. Let's face it, outstanding invoices are like money locked away in a vault – you know it's there, but you can't access it. This is where many businesses fall into the trap of reactive accounts receivable (AR) management, scrambling to collect payments only after they're overdue. This isn’t the way, folks.

But what if there was a better way? A way to transform your AR process from a frantic game of catch-up into a well-oiled cash flow machine? Enter proactive receivables management and what I am here to help you and your business with!

The Perils of Playing Catch-Up

The dangers of a reactive AR approach are real and can significantly impact your business. I’ve seen this first hand and have helped many businesses over the past decade overcome this and streamline their business and implement a proactive approach.

• Cash Flow Struggles: Uncollected invoices tie up your working capital. This is the lifeblood of your company, used to fund daily operations, invest in marketing, or explore new ventures. When a significant portion of your revenue is locked away in outstanding invoices, it hinders your ability to grow and innovate.

• The Rise of Bad Debt: The longer an invoice goes unpaid, the higher the chance it becomes uncollectible. This translates to lost revenue that could have been used to reinvest in your business or reward your employees. I’ve managed bad debt several ways, but our ultimate goal at Guernsey Consulting is to eliminate this for your business. We can get there and I’m ready to ride that bus with you to the finish line!

• Strained Relationships: Chasing down late payments can feel intrusive and damage customer relationships. Imagine the frustration a customer feels when bombarded with calls about a forgotten invoice. This negativity can lead to lost business and hinder future sales opportunities. We want to avoid that and BUILD those relationships the right way.

Taking Charge with Proactive Strategies

By implementing a proactive AR system, you can flip the script and gain control of your cash flow. Does this happen overnight? No. Plain and simple you are going to have some work ahead of you that requires getting your team on board and also your customers who have been loving the float they are getting by you being so laxed with them.

• The Power of Automation: Leverage technology to automate routine tasks. Set up automatic email or physical statements to be sent out regularly. This keeps customers informed about their outstanding balances and gently prompts them to prioritize payment before the due date. Your team should automate where possible, but they HAVE to pick up the phone and check on customers. Many accountants, believe it or not, are likely a tad introverted. So, try a call and if no one answers send an email. 9 out of 10 times I go with emails, but that’s just what has worked in my industry.

• Building Rapport Through Communication: Schedule regular calls with customers nearing their due dates. It doesn't have to be a collection call! A friendly reminder and a quick conversation about their upcoming payment can go a long way in establishing rapport and ensuring timely payments. Aim for weekly or bi-weekly calls for invoices nearing their due date that struggle to pay you timely or respond.

• Real-Time Visibility with Daily Cash Posting: Ensure prompt and accurate recording of all payments received. Daily cash posting gives you a real-time picture of your AR and allows for quicker follow-up on outstanding invoices. This way, you can identify potential issues early on and address them before they snowball. Small team? They should initially focus on that cash being posted, run statement information, and then get to work on collecting/confirming payments.

• A Clear Roadmap: The Collections Policy: Develop a clear and documented collections policy. This policy outlines the specific steps your AR team takes at different delinquency stages. A well-defined policy ensures consistency in how you approach late payments, avoids confusion for your team, and protects your customer relationships by establishing clear expectations.

Building a Proactive Daily Routine

Here's how a proactive daily workflow for your AR team can look in the real world. All businesses are different, so let’s work together on the best strategy for your team that maximizes their daily potential.

1. Start Your Day Informed: Begin by verifying all received payments are accurately recorded through daily cash posting. This ensures you have a clear picture of your current AR situation. Is your banking automated and integrated into your system? Need help figuring that piece out? I have you covered.

2. Identify Accounts at Risk: Analyze your AR aging report to pinpoint invoices that are past their due date. This report categorizes your outstanding invoices based on how long they've been overdue.

3. Prioritize for Action: Don't tackle every overdue invoice at once. Categorize them based on severity (how late they are) and assign them for appropriate action based on your collections policy. For example, a slightly overdue invoice might warrant a friendly reminder email, while a significantly overdue invoice might require a phone call to discuss a payment plan or next steps that will be taken if payment doesn’t reach you by “x” date.

4. Communicate with Confidence: Make phone calls, send emails, or schedule meetings as outlined in your collections policy. The key is to be persistent yet professional. Focus on clear communication, explain the situation, and work collaboratively with the customer to find a solution.

Reaping the Rewards of Proactiveness

By embracing a proactive AR strategy, you'll unlock a few positives for your business and we ALL want positivity, right?!

• Improved Cash Flow: Faster collections translate to more readily available money for your business needs. This financial security allows you to invest in growth initiatives, explore new opportunities, and weather unexpected challenges.

• Reduced Bad Debt: Early intervention minimizes the risk of invoices becoming uncollectible. This protects your bottom line and ensures the revenue you generate translates into actual cash flow.

• Stronger Customer Relationships: Regular, professional communication fosters trust and a sense of partnership with your customers. By addressing overdue invoices proactively, you can avoid the negativity associated with late payment demands, strengthening your customer relationships and promoting long-term loyalty.

Customer relationships matter and your team needs to understand that. If they are slow to reply, provide invoices, statements, etc. then we have some work to do. Ready to get rolling and collect some cash?

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Want some help with your AR? Listen to these 10 tips below on how to help you manage the AR process. Some of these may sound familiar!

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