How to Supercharge Your Collections
And Get More Money Coming in the Door in 2025
“Show me the money!”
—Jerry McGuire
Sales are great, but do you know what’s even better? Getting paid. I have seen businesses stagnate because large portions of their sales take months – or even years - to collect. Improving your collections is a great way to get more cash in your coffers that you can use to invest in growing your business.
You can drive better collections in several ways:
The Long and the Short of It: Update Your Payment Periods
Shorten your payment terms to a period that makes sense for you and your customer. Is 90 days from receipt of an invoice reasonable? Should it be less? Is there an industry standard that you should be mindful of? You need to balance your cash needs with those of your clients (remember, they need cash too), but there is usually room to maneuver.
Dial for Dollars: Assign a Pro on Collection Duty
Allow your salespeople to focus on selling and maintaining relationships while your collection team works directly with a client’s payables department to get payments more quickly. They can also work out a payment plan with customers who may be struggling to pay due to short-term constraints. Take care not to be too lenient to the point where all your customers are on special payment terms as that defeats the purpose.
Pay Early and Save: Sweeten the Pot with Early Payment Discounts
You may be able to offer a discount for payments made within a specified period to incentivize customers to pay early. For example, if most of your invoices are due in 45 days, you could offer a 2% discount if paid within 10 days. This tactic allows those in a strong cash position to take advantage of the discount to put cash in your hand more quickly.
Note: It would be a good idea to run a study on the impacts of a discount program before implementing it, so that you consider whether the quicker payments are worth the discount.
Cash, Swipe, Tap, Wire: Specify Accepted Payment Methods
How many times has someone told you their check is in the mail, only to still be waiting for it weeks later? ACH and wires will clear the bank much faster, and without the need to set up a lock-box account or to manually handle and deposit the checks. Checks can also be more susceptible to fraud schemes. Credit cards are also an option; however, you need to keep in mind processing fees which can be costly.
Show Me What You Got: Consider Up-Front Payments
Depending on your business you may be able to request full payment up-front, or a partial deposit upon signing a contract or sales order. Having the customer pay some or all of an order up front allows you to cover some of the initial costs of providing your good or service without waiting for the total payment after delivery.
Think of a software company that sells access on a subscription. Many times, you have the option to pay a monthly fee, or to pay for a whole year up-front for a slight discount. Encouraging more customers to pay for the annual subscription provides more stable cash flow while also promoting better retention rates.
Embrace Strategic Commissions: Reward Collections, Not Invoices
The way you compensate your sales team can affect collections. For example, commission policies can be set so that a salesperson receives their commission based on the amounts collected from their customers, as opposed to a percentage of what’s been invoiced. Commission based on invoicing carries the risk of you paying out commissions on an invoice well before it’s paid, putting unnecessary stress on your cash reserves.
The added benefit of tying compensation to collections is that your team will be more inclined to do business with people or businesses that are more likely to pay timely.
Summing it Up
A fractional CFO can work with you to strategically boost your cash inflows by helping to implement these processes. Don’t get carried away counting all those birds in the bush when you should be focused on how to get those little birdies into your hands. Take action today to ensure collection challenges don’t stunt your business’ 2025 plans.
For more tips on optimizing your company’s cash flow, check out this article: https://www.crystaloakcfo.com/blog/fractional-cfo-5-cash-management-tips.