For many businesses, invoice payments are a source of ongoing cost and headache. In this article, Graham Bowers discusses ways to improve your situation.
Your business growth and success depend on the health of your cash flow. The more cash reserves you have, the more confident you can be in exploring new opportunities, scaling your business, or paying off debts.
Overdue invoices are one of the key factors that can hamper the health of your cash flow.
In fact, cash flow was reported among the top three reasons for 51 percent of failed business in the 2018-19 financial year, according to ASIC.
And in the June 2020 quarter, debtor days increased by 7.7 percent year-on-year, the sharpest increase in 10 years according to Illion (previously Dun & Bradstreet).
While invoicing terms and eInvoicing have become an increasingly frequent part of the discussion at industry level, there is yet to be a holistic framework offered. Instead, business owners should consider how to best integrate the systems at their disposal.
This article discusses the common ways businesses currently approach invoice payments as ‘best practice’ before offering three ways in we can all do better.
Invoice payments and credit terms: Risk vs reward
Business owners or CFOs are typically engaged in a balancing act between managing the risk of late payments and offering credit to loyal customers that can help increase sales and retention.
To add to the complexity, the ongoing economic and social climate has brought fresh challenges in the business sphere where late payments are compounding the problem of reduced sales volumes.
While businesses have traditionally deployed email reminders, dunning letters and phone calls to get their invoices paid, these have yielded less than optimum results.
A sale’s not a sale until the cash is in the till
General practice considers customers only to be overdue 90-days after the invoice date. But, at the end of the day, unless the cash in the bank, an invoice unpaid is an invoice overdue.
Averaging across the payment trends of over 200,000 businesses that use ezyCollect, we found that over 40 percent of ledgers are overdue and outside terms.
For an average-sized business with a monthly turnover of a million dollars, this can represent $400,000+ of cash tied up in receivables.
What could you do with an extra $400,000 in your business bank account?
Write-off writing off bad debt
Credit references — which, to be honest, are little more than hearsay — are subjective and unreliable. Obtaining credit reports, which are based on verified data, are expensive and are costly on administrative resources. Yet we rely on these ‘best practices’ before issuing credit terms.
We should no longer have to accept that a proportion of our ledger will end up as bad debt.
3 ways to be better than ‘best practice’
Tailored, polite (and persistent) reminders — After 45-days end-of-month terms, people genuinely forget. In FY21Q1, just over 50 percent of overdue receivables were collected when customers were sent a reminder, averaging across the payment trends of over 1,000 Australian and New Zealand businesses.
Provide a variety of self-service methods for payment — 22 percent of B2B credit card payments are made after 5pm and before 9am. Make it easy for customers to give you money by allowing them to make payments at any time in a method convenient to them.
Utilise smart data to understand how customers will pay you — Even if you leverage credit reports, these only reflect how a customer has paid the industry in general. It doesn’t look at their payment behaviour towards you specifically. Take into consideration company events such as a change in directors or penalty notices as well as your rapport and relationship with them.
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Reproduced with the permission of MYOB. This article by Graham Bowers was originally published at https://www.myob.com/au/blog/3-ways-to-better-manage-invoice-payments-in-2020/
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