In a world where cash is king, cash flow is all important to ensuring the survival of any business, which has been bought into even sharper focus now in our new COVID-19 world. Whether your business is sailing smoothly, treading water or struggling during these tough economic times, having a reliable collection strategy is integral to remaining solvent.

What is a cash collection strategy?

A cash collection strategy is one way to ensure that your accounts receivable (money in) stays under control and you continue to collect your cash and a collection strategy sets a particular standard and a set of processes on how to collect your money from people who owe you money for goods or services.

It involves a systematic approach to managing accounts receivable, optimizing cash flow, and minimising bad debts. The strategy may include clear payment terms and conditions, regular follow-ups on overdue invoices, and the use of various payment methods to make it easier for customers to settle their accounts.

The goal of a cash collection strategy is to ultimately improve the organisation’s liquidity and financial stability by ensuring that cash is collected and made available for operational needs promptly. This requires a balance between maintaining good customer relationships and taking proactive measures to ensure timely payments. A well-defined and consistently executed cash collection strategy is crucial for the financial health and longevity of any business.

The problems cash flow can cause

Many businesses do not realise just how much cash is NOT flowing. The key to the future of a business can be tied up in just that process – the gap between money out and money in, and to enable your business to survive you need to make sure that the people who owe you money for goods pay you on time.

Not receiving monies on time for goods and services, means you may well not have the money to pay your bills and staff and is a fundamental requirement for a successful business. It’s time therefore to review your cash collections strategy. As a business you can set your own payment terms.

Many small businesses and sole traders submit invoices which are payable on presentation. Other common terms of business are seven days, 14, 28 or 30 days. However this means you should have the cash in your account by that date. This is not the timescale that you should then use to start a collection process to chase cash. All too often, invoicing and chasing cash is not given the focus it needs and particularly when a business is in trouble, this needs to change and quickly.

Steps to take to improve your cash collection
  • Review your overall invoicing and cash collection strategy and ensure that it is someone’s responsibility within the business to manage this most vital of tasks. Sometimes this job is given to reception staff or office administrators and often it will not be done properly or in a timely manner. Asking people for money is difficult so ensure adequate training is given to enable them to do the job properly and well. If you have a credit controller this is their job to manage this process proactively.
  • Review your whole process carefully. What is your process? Is it too long? Is it fit for purpose? Make the changes needed.
  • As a business you should not be waiting until a payment is due to start chasing that debt. If you know when your customers set their payment run, call your customer to check that payment is on the next run. This can often be done under the guise of a customer care call – are they happy with the product/service etc.
  • Do not send a statement by mail as the next communication, this will not encourage payment. Send an email invoice reminder.
  • Call the customer and ask when you can expect to receive payment – after all this is your money. If there is an issue with the goods, be prepared to sort this out. However this should not prevent a customer paying for the goods that are correct, so push for a part payment.
  • Keep calling your customers at regular intervals until you receive payment. Customers will almost certainly divide invoices into urgent and ‘can wait’. If you keep calling, you keep your invoice top of their list.
  • Develop good relationships with the credit control team at your larger customers.
  • If payment is not forthcoming get in touch with your actual business contact – they may be able to expedite payment as they are not close to the accounts team.

If payment is still not forthcoming do not delay in starting the formal proceedings and contact a debt collection expert. If you work with the correct third party, they will support you in the collection of your debts, without damaging your reputation.

What else can I do to help with cash collection

Review your terms of business. When many businesses start out it is often the case that the terms of business can be a slight afterthought, often ‘borrowed’ from somewhere else or found on the web. In order for a business to claim all monies due to them, it’s vital to ensure your terms are drafted correctly and includes several very key elements. An important thing to consider is:

  • Do your terms of business do what you think they do?
  • Do they allow you to recover your goods if your customer becomes insolvent?
  • Do you have an enforceable retention of title clause within your terms of business?
  • Do your terms of business allow you to recover collection costs or claim contractual interest on overdue invoices?

If you are in any doubt we can review your terms of business, ensure they are drafted correctly and review your cash collections strategy ensuring you are in the best position to ensure your cash keep flowing.

Get In Touch

Jayne has worked in the legal sector for over 20 years, having started her career in the factoring industry, and joined the firm in 2013. She provides clients with support and advice relating to debt recovery, litigation and credit management.
She specialises in all aspects of debt recovery and credit management, advising clients on collection of debts and internal credit procedures.

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Published: 21st October 2020
Area: Corporate Restructuring & Insolvency

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