Your provide quality products or services to your customers with competitive credit terms but they’re taking too long to pay you. What should you do? This is a fundamental question facing business owners and financial executives every day – especially in lean economic times.
The first thing you should do is to focus on collecting your cash. Afterall, accounts receivable is typically the largest or second largest asset for most businesses. If you sell something and you don’t receive payment – did you really accomplish anything? No. Collections is simply a stage in the overall sales cycle.
Dedicate someone to focus on your accounts receivable. This can be a CFO, controller, or credit manager in larger organizations but find someone who can take the lead on this important project.
Next you need to understand where you’re at today in order to determine what you can do to be more effective in your collections process. Calculate your days sales outstanding and compare yourself to similar-sized companies in your industry using the Credit Research Foundation’s Benchmarking Survey. Alternatively, you can use the Anytime Collect ROI Calculator for basic DSO calculations.
Find out why your customers aren’t paying you on time. You can accomplish this by simply calling your worst offenders. You may find out that you aren’t sending the invoice to them in time for them to pay you within their terms or perhaps you continue charging them tax when they’re tax exempt or your shipping the wrong product or billing them the wrong rate. There are many simple things you can do to improve your on-time payment with simple changes within your organization.
Once you know where you’re at, you can set goals for making improvements. For example, one company, Systems Maintenance Services identified that their DSO was at 67. They set a goal to reduce DSO to 55 in the following year. By implementing small changes and using a system to help them manage the collections process they were able to achieve that goal with a DSO of just 49 (DSO was 40 excluding just two of their accounts). Find out how they used this information to truly transform their business.