It is the end of the month, payroll is on Friday, and the accounts receivables shows eleven invoices that have not been paid yet. The work has been done, invoices have been sent out, and clients seem to be happy. However, they money has not arrived yet.
Most businessmen are familiar with this situation. Magicbooks devotes a large part of its work to solving this issue. The process is usually the same. The delay is seldom due to one big failure. More often than not, it is connected with small gaps between signing an agreement and actually using the money. This whole process is called invoice to cash, and improving it can be one of the simplest and fastest ways to improve cash flow without selling anything else.
Where the time actually goes
Regarding invoice to cash, it ought to be treated as a chain rather than a single chase to the end. The starting point is the agreement on terms. Then, the outcome of the process depends on the invoice issued as well as reminders and cases of disputing the amount in question. Lastly comes the stage when payments are booked properly, which is of utmost importance. There should not be any weak points in the process chain. An earlier Atradius survey conducted among US companies showed that the most widespread reason stated for delayed payments is inefficiency in the payment processes of customers’ companies. That indicates that the reason for delayed payments can be eliminated.
Getting the front end right
One of the best ways to improve the collection of accounts receivables is to ensure that payment terms are settled in writing before you start providing your products or services. Yes, it is normal for businesses to have their customers settle debts within 30 days, but the practice is not enforced in any way. Companies offering payment terms longer than a month (45 days or 60 days) to their clients are practically giving out free loans.
Next comes your invoice. Do not wait until the end of the month to send it; instead, send it as soon as the requested work is done or delivered. Each day that you delay is another day that your customer has to approve the invoice and start its processing. Also, make sure that your invoices are flawless. Mistakes may lead to unnecessary delays. A simple checklist for your employees tasked with preparing invoices will be very helpful, as well as asking your customers about their invoice approval procedures.
Next, make payments as easy as possible. Having a payment link on the invoice and allowing customers to pay by either ACH or credit card eliminates minor inconveniences. Customers intending to make a payment the next day are prone to forgetting, and the inclusion of a button to click within the email makes the time lapse much shorter. Moreover, some companies provide a discount of a modest percentage for early payments, for example, 2% for payments made in less than ten days. Although the discount is not for free, it may be less costly than borrowing for that period.
Reminders that keep the relationship intact
Failing to follow up with a client after sending an invoice is a mistake many companies make. Sending a reminder a couple of days prior to the due date can be useful since it is possible that the client has simply forgotten about it. A reminder must also be sent out on the due date and, consequently, days after it: the third day after the due date, the seventh day, and then the fourteenth day.
When sending such reminders, one’s tone of voice is probably one of the most important factors one should consider. There’s a significant difference between sending a reminder that sounds friendly and contains a person’s name and a phone number compared to sending an impersonal reminder.
This is where automation can be very useful. According to the Billtrust and Wakefield Research survey of 500 CFOs in major companies, 99% of those who used AI-driven workflows managed to lower their DSO while 75% of them did it by at least six days. Magicbooks’ accounts receivable services focus on faster invoicing and collections, along with proactive credit management, which suits owners who would rather not run that routine themselves. And for the day to day habits behind all this, its guide to accounts receivable best practices is a good next read.
Disputes and cash application
Regardless of how flawless the invoice is, customers may still have trouble regarding something. A received quantity is incorrect, the discount has not been included, or the service does not correspond to the expected one. Disputes pile up and may cause delays in payment. The best way to deal with disputes is to treat them as separate issues that need to be documented and registered. Find out what the exact issue is, fix it, or explain it if nothing can be changed about the invoice.
One more step that people tend to forget is cash application. It is important to match the payment to the invoice properly because sometimes customers pay several invoices in one payment or do not transfer a full amount. If the match was not done correctly, the invoice will be considered overdue. Clean, current books make matching far easier. Magicbooks’ bookkeeping cleanup guide walks through getting records into shape so payments can be matched quickly and correctly.
The numbers worth watching
You can’t improve what you only feel. A few measures cover most of what an owner needs. Days sales outstanding, or DSO, is the average number of days it takes to collect after a sale. An aging report groups unpaid invoices by how overdue they are, say 1 to 30 days or 61 to 90, so you can see where the older problems are sitting. The collection effectiveness index compares what you collected against what was there to collect during a period, and it’s handy because a busy sales month doesn’t distort it.
Review these monthly, at least. Magicbooks has a post on reducing days sales outstanding without losing your customers that goes deeper on DSO, and another on financial reporting for small business that shows where these numbers fit among the reports worth reading each month. One caution, though. DSO can look healthy while a few large overdue invoices hide underneath it, so read the aging report next to the average and not instead of it.
Faster collections pay off most when they feed your planning. If you know your customers really pay around day 35 rather than day 30, payroll and supplier payments can be scheduled around real timing and not hopeful timing. Magicbooks also has a walkthrough of a practical cash flow forecasting model for business owners, which pairs nicely with the metrics above.
Where to start this month
None of this needs a big project. Pick the one link in the chain that costs you the most, which your aging report will usually point to, and fix that first. For some businesses that means sending invoices the day the work finishes. For others it’s finally writing down a reminder schedule, or asking why the same few customers are always late.
Small gains add up. Take a few days off the wait and the difference shows up in payroll week, and in how much the business needs to borrow. Magicbooks works with small and mid-sized businesses on exactly this, keeping records current and inflows moving. If you’d like a second pair of eyes on your own invoice to cash process, you can get in touch with the team and talk it through.
