8 proven ways to accelerate your collections
Updated: May 24, 2019
First things first, we should keep in mind - that reducing AR (Account Receivable) days - has a positive impact on working capital - i.e. it saves on interest costs, and/or frees up capital for fueling further business growth. To illustrate, reducing AR days by 10 (say from 60 days to 50 days, for a business of turnover say INR 10 crore, and profits INR 1 crore)) can add INR 2.73 Lacs to profit, or about 2.7% profits. So lets head straight into what could be done to reduce AR days:
Having a proper credit policy in place (who to extend credit to, how much, and how to monitor)
Price for credit: know your customers, and use the credit cost to determine the right pricing for each customer. Often, some of your big customers may not be the best, because they pay you very late. Small subtle changes to pricing based on payment record, can induce customers to either pay you on time, or effectively pay for the cost of credit
Ensuring credit (policy) awareness among all teams - sales, finance etc. so that there is no gap between policy and actual implementation
Proper customer on-boarding and data management - so that the business has ability to know, analyse and track (credit) customers at all points of time
Having an efficient invoicing and accounting process, such that internal and external views of the receivable are aligned - to this effect - business needs to ensure Purchase Orders are tracked, invoices are sent to right person, and sales dues (and receipts) are properly recorded
Efficient Collections Follow-up Processes - despite best intent, many businesses fail to track their receivables and follow-up with customers when they need to. Empirical evidence suggests, that time taken to collect can be reduced by 20%-50% with proper processes in place.
Alignment of Incentives and Pricing policies - with right data and insights in place, businesses can and should incentivize sales (& finance) teams for earlier collections, and also seek to adjust their pricing with customers, by linking it to their payment track record.
Sell your receivables: If after following the good credit management practices, you are still saddled with big AR, and need to bring AR days down, you could consider invoicing discounting / factoring. Effectively, through these, the financing companies offer you immediate cash for a discount on future receivable from the invoice. Many companies would do this towards the financial year-end for various accounting and ratio management reasons.
Good receivables management is essential not only from a working capital management perspective, but also gives businesses to have confidence to invest in growth (with reduced worries on credit risks).