Being a small business owner isn't for the faint of heart.
But of all the fears and uncertainties small business owners face, a lack of available capital has to be the biggest monster under the bed.
For a lot of small business owners, though, the fear is real. The National Federation of Independent Business found that cash flow is a "continuing problem" for one in five small businesses, while 50% of small businesses experience occasional cash flow difficulties.
Wall Street Journal and BusinessWeek best-selling author David Finkel says that "poor collection on receivables" is the number one cause of cash flow issues. According to Finkel:
The first place to look if you are suffering from a cash flow challenge is at your balance sheet and collections practices. Are you collecting all of what you are owed? Are you collecting this money in a timely basis? How much are you spending on your collections efforts?
Figuring out if your company has a cash flow issue isn't difficult. But it's also fairly easy to determine whether poor accounts receivable collections are the underlying cause of cash flow problems.
The place to start is with a metric called Days Sales Outstanding. If you aren't already familiar with the term, it's a measure of the average time it takes to collect on credit sales.
The formula to determine your Days Sales Outstanding, or DSO, for any given reporting period is simple:
DSO = (Accounts Receivable Balance ÷ Total Credit Sales) × Number of Days in the Period
For instance, if you have a remaining Accounts Receivable Balance of $100,000 on $150,000 of credit sales during Q1 (90 days during the period), your DSO is 67.5 days.
According to advice from Investopedia, a DSO of under 40 days is considered "low." The differential of 27.5 days between our example and a "low" DSO represents 27.5 days that cash is in your clients' accounts earning interest, rather than yours. It also illustrates the point that you'll need to have increased capital reserves during that period to make good on your own payment obligations.
The good news is that figuring out how to manage collections in a timely fashion is a problem that has been solved by countless businesses. And, they each had their own foot-dragging invoice payers to contend with.
That's not to say that ensuring timely payment isn't without challenges. Maintaining an effective collections process means:
Tedious tasks such as these are exactly the sort that people aren't so hot at, but software excels at. Software loves keeping a flawless and regimented schedule and running complex calculations. Overworked small business owners with more important things on their plate? Not so much.
With capable accounting software, improving your collection times and minimizing cash flow issues is a matter of setting up the logic for a common-sense automated collections process once, rather than taking on menial AR tasks time and time again.
In order to find software capable of putting a real dent in collections-related cash flow problems, look for the following features:
If you're lucky enough to supply a recurring billing service, offering an Electronic Funds Transfers payment option not only will help you dramatically reduce collection times, it'll make your customers lives easier. In general, whatever your company sells, anything you can do to offer customers payment flexibility will help you get paid faster.
Without proper planning, though, supporting secondary payment platforms can create additional administrative work–which may slow down overall collection efforts. Accounting and billing programs with native support for multiple payment options or strong APIs that allow for easy integration can help keep receivables streamlined.
Even the most basic commercially available invoicing software these days will make it easy to email invoices to customers. When you're able to communicate the balance due quicker, you're able to get paid quicker. It's as simple as that. Issuing instantaneous email invoices can quickly cut 2-3 days off your Days Sales Outstanding.
Incorporating interest based late fees for payments beyond their due date is an important tactic for encouraging prompt payment. Manually calculating late fee payments when customers exceed Net 30, Net 45, or whatever terms you set is no fun, though. But, again, even basic AR software should allow you to easily calculate late payments.
That being said, not all billing programs will provide you with the same measure of control. If you want to ensure that important customers who usually pay on-time aren't socked with annoying fees, you'll want to look for a billing program offering configuration options or an approvals process related to late fee assessment.
Bugging customers to pay isn't anyone's favorite job responsibility. It's often awkward and it's always a pain in the neck; and that's why it can easily go overlooked. Leaving reminders and dunning letters to your billing software is a much better way to make sure they get sent.
Billing programs with the sophistication to enable conditional logic for which letters should be sent, when, and under what circumstance, will ensure that consistency in sending reminders is balanced with an appropriate amount of tact in your collections messaging.
When it comes to customer interaction, the carrot has some obvious advantages over the stick. As such, early payment discounts can be an attractive way to incentivize prompt payment. Offering terms such as 1/10 Net 30 is a common strategy to get clients paying faster.
Don't like the idea of giving away a percentage of the money owed to you? That's understandable, but think about it this way: Unless you are able to collect in excess of 98% or 99% of your receivables on average, any time your customers take advantage of one or two percent early payment discounts, you are saving money. And, that's before you even consider costs related to sending follow-up reminders and taking other steps to secure payment.
Most billing systems can easily support early payment discounts. But making the accounting adjustments necessary to apply cash discounts can be cumbersome. Programs that offer tools specifically designed to streamline the process and automatically apply the accounting adjustments necessary will help keep the time spent on non-revenue generating administrative work to a minimum.
If you're interested in finding software that can help improve your collections and reduce your cash flow issues, help is closer than you may realize. Our accounts receivable software guide includes a list of popular products ranging from standalone billing systems to full ERP packages with AR functionality. Or, if you'd like to get personalized suggestions for the top accounts receivable software for your needs, feel free to check out our no-cost software matching service.