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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 vital to managing the order-to-cash cycle. Without a cash collection process, your organization risks a backlog of unpaid invoices that may become uncollectible. Without steady cash flow, your business may become insolvent.
We have put together this guide on how to set up an efficient cash collection process to help you avoid further disruptions in your cash flow and business operations.
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. Processes for sales applications should be evaluated for proper creditworthiness, orders entered correctly, and billing 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 report shows the accounts with unpaid balances that are either current or past due.
Past-due invoices become increasingly difficult to collect. Therefore, it is ideal to review an aging report frequently. 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 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 yet become past due can be contacted by friendly email notices to remind your customers their invoices are coming due soon. Determine when these contacts should take place and lead your AR team.
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 a reminder 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 step up the contact efforts. Send another contact notice letting your customer know the invoice is now past due; if there is no response with payment, a collections call should be placed to get payment.
If a past-due customer ignores 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, formally requests a customer for the debt they owe. The letter spells out the next steps in your collections process if the debt continues without pay.
Past Due Customers Beyond 30 Days
Thirty days is the typical allotment for customers to pay for invoices. Accounts that are 30 days past due require more collection tactics than 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 effectively gets payment from a non-paying customer.
If this does not help payment, you can revert to other measures, such as 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 automating collection notices for your customers easier. This leaves your collections team with more time to address billing errors and other hands-on items that prevent 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, reporting on your AR aging is 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 will work successfully within your organization.