Manufacturers in the United States are a vital part of the economy. The manufacturing sector is responsible for approximately $4 trillion in sales annually. With these high sales numbers, the industry must have efficient invoice collection processes in place.
Most manufacturers and business owners understand that cash flow is the backbone of a company. Failure to effectively manage the cash flow of a business could render it non-existent. The most common threat to manufacturers’ cash flow is late payments, which results from having inefficient invoice collection processes. If you are a manufacturer with cash flow issues, here are the three major mistakes you could be making in collecting invoices that could significantly affect your cash flow.
Giving Credit Terms That Are Too Long
It would be great if businesses could make sales on a cash basis only; however, this is not always possible. Companies operate in a highly competitive environment; therefore, if your competitors are offering credit terms to customers, it is advisable to come up with similar arrangements to ensure that you remain in business.
On the surface, it may seem like offering credit to customers is an excellent way to attract them, increase sales, and create a long-term relationship. While this may be true, there is a risk that you may not get paid on time if you extend credit. This can cause cash flow issues that limit your business to meet its financial obligations.
Credit terms are essential because they set the time limits for payment on the sold merchandise. The terms vary from one business to another; however, the common ones are 30 days, 60 days, or 90 days. Having longer credit terms will mean that your business will have a large accounts receivable balance, and it will have to wait much longer to get cash inflows from collecting the pending balances.
Additionally, if you offer longer credit terms, you will need to focus more on accounts receivable management. This takes a lot of time and energy because it is more than just sending invoices and acknowledging payments. It entails understanding the concept of avoiding bad-debts, resolving late payments issues, and invoice disputes.
Not Vetting Customers Before Offering Credit
Credit vetting entails examining a customer’s or an organization’s data to establish their creditworthiness and assess whether you should be extending any form of credit to them. This data will include credit histories, payment reports, and other relevant information that you deem necessary to assist in vetting a customer’s ability to pay credit extended to them.
You can ascertain the creditworthiness of a potential customer by running a credit report using the major credit agencies, or asking for references and checking them out. Bank references are usually frequent in such situations.
A credit application form is another important tool that you can use to assess a customer’s creditworthiness if you ask the right questions. Your questions can be focused on the following areas: the duration that your customer has been in business, how they intend to pay you, and how they usually pay other suppliers.
The decision to allow customers to get goods on credit should be a conscious one. You do not want to lose revenue because you sold off products to a “wrong” customer, who is not creditworthy and will not pay the amount due to you.
It is essential to remember that knowledge is power. Hence, if you vet your customer appropriately, before engaging them and offering any credit terms, you will minimize the risk of having overdue account receivables. The essence of having an efficient vetting procedure is to use accurate data to make strategic decisions for your business.
Extending Credit Terms Based on a Few Similar Transactions
Extending credit terms to customers is not a simple affair. Determining which the risky or creditworthy customer is, can either increase or decrease your cash flow.
Building trust is an essential element when extending credit. Before you extend a customer’s credit terms, you need to be sure that you can trust them to stick to the new terms. One of the best ways of building this trust is to interact with customers more, and access if they are adhering to the current credit terms.
You should only extend their credit terms once you have determined their willingness to repay debts. This willingness cannot be established from a few similar transactions. You have to give the business relationship a chance to grow if you want to extend your customer’s credit terms.
It is worth remembering that the longer the time extended for invoice payment, the riskier the payment becomes. As you become more confident in your customer’s ability to pay, you can increase their terms by a few days.
A Collection Agency Can Be the Solution to Your Invoice Collection Problems
Managing debt collection and accounts receivable can be quite a hard task, because it is time-consuming, and may ruin the relationship that you have worked so hard to build with your customers.
If you want to maintain the relationship with your customers and have peace of mind knowing that your invoices will be collected on time, you can outsource the debt collection function to a collection agency.
The agencies have the expertise, resources, and time required to collect invoices. If you select an agency that is polite and deals professionally with your customers, then there is a high possibility that you will retain the customers compared to when you resort to legal action. This gives you enough time to focus on other aspects of running your business.
If you are dealing with a customer that refuses to pay on time, the agency can engage solicitors on your behalf.
Offering credit to customers may be difficult because of the significant risks involved. However, some proven simple methods can mitigate the risk, and ensure timely collection of invoices. Running credit checks, having a credit policy in place, and involving a collection agency can ensure that your credit management process is seamless.