A cash collection call can be intimidating to receive and make. If you give products or services on credit, you create accounts receivables (AR) and have likely had to collect an unpaid balance.
Cash collection is a vital part of managing the order-to-cash cycle. If your organization does not have a cash collection process, you will risk a backlog of unpaid invoices that may become uncollectible. Your business may then become insolvent if there is no steady cash flow.
To help you avoid further disruptions in your cash flow and business operations, we have put together this guide on how to set up an efficient cash collection process.
Understanding the Order-to-Cash Process
The order-to-cash process, also called the customer cycle or the AR cycle, is the journey a customer takes from the time they place an order with your company until they pay for their order. The order to cash process has five components:
- Sales and Credit Application
- Order Placement and Fulfillment
- Invoicing
- Collections
- Cash Applications
Before creating a collections process for billed invoices, ensure the first three parts of the order cycle are iron-clad. Ensure processes for sales applications are evaluated for proper creditworthiness, orders are entered correctly, and billing is produced with accurate charges.
The Cash Collection Process
If billing is accurate, a collections process will prevent invoices from becoming past due and collect money on invoices that have become past due. A collections process will address how customers are notified about balances due and will manage payments as they come in.
Analyze Accounts Receivable Aging
An accounts receivable aging is a report that shows the accounts that have unpaid balances. These balances will either be current or past due.
Past due invoices become increasingly difficult to collect. Therefore, reviewing an aging report frequently is ideal. Once the aging report is reviewed, identify accounts that are almost due and unpaid and accounts that are freshly past due. Assign these accounts to a collections schedule.
You should also review payment trends and identify customers who are more likely to become past due. These customers require consistent communication that helps prevent additional payment issues from them.
Near Past Due Customers
Accounts that have not become past due yet can be contacted by friendly email notices to remind your customer their invoice is coming due soon. Lead your AR team by determining when these contacts should take place.
An ideal frequency for a customer with a soon-to-be past due bill is a reminder five days before the bill is due, a second reminder two days before the bill is due, and on the due date.
Newly Past Due Customers
If you have an account that has just become past due, and the customer does not respond to any contact notices before the due date, it is a good idea to take the contact efforts up a notch. Send another contact notice letting your customer know the invoice is now past due, if no response with payment, a collections call should be placed to get payment.
If a past due customer continues to ignore contact efforts, your collection effort must become formal. Prepare a notice to send to the customer. These are called dunning letters. A dunning letter also known as a demand letter makes a formal request to a customer of the debt they owe. The letter spells out the next steps in your collections process if the debt continues to go without pay.
Past Due Customers Beyond 30 Days
Thirty days is the typical allotment for customers to pay for invoices. Accounts that have aged past 30 days require more collection tactics beyond letters and phone calls. You should work with other parts of the organization to assist with getting payment. The salesperson’s relationship with a customer is effective in getting payment from a non-paying customer.
If this does not help payment, you can revert to other measures like placing the customer’s account on a credit hold or suspending service if applicable.
Implementing Collection Software
Consistent communication is a key part of a cash collection process. Customers can miss dunning letters leading to inconsistent messages about your expectations for them to pay on time.
Accounts receivable workflow tools make it easier to automate collection notices for your customers. This leaves your collections team with more time to address errors with billing and other hands-on items preventing customers from paying.
In addition, you can schedule systemic collection notices, which helps you stay in contact with doubtful accounts and other customers who habitually pay late.
Final Thoughts
Because collection software is cloud-based and secure, it makes reporting on your AR aging easy. It also allows collection personnel to easily manage accounts, see balances, and document and pre-schedule contact efforts with customers.
As long as your team is dedicated and you have an efficient AR management program, the cash collection process is bound to work successfully within your organization.
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