No one wants to wait to get paid. Delays cost you money and growth opportunities. Yet, you also need to be fair and competitive with your customers. Are you potentially waiting too long to seek out pay for fear of pressuring customers? Alternatively, waiting too long could limit cash flow so much that it's stifling your ability to meet your financial obligations.
It’s a balancing act, but knowing when to act is critical for maintaining financial health. Customers are likely to be late from time to time, but having a plan in place to handle late payments creates more predictability and could help minimize financial risks to your organization over time.
In the ideal world, an invoice is issued, received by the customer, and paid within 30 days. When that doesn't happen, it triggers a sometimes long, drawn-out process that can be costly for your organization in several ways:
There’s no doubt accounts receivable automation can help in this way. It allows you to set up a streamlined, efficient, and automated process for sending late payment notices and collecting on them. That way, everyone is on the same page and your cash flow is easily maintained.
How long is too long? When should you set up a late payment collection process? There are a few elements to your business that could provide you with insight into this.
There’s no hard rule for how and when to send late payment notices. You should always follow the requirements within contracts and agreements. Beyond that, there are a few key signs that you could be putting your business at risk by waiting too long.
It’s one of the most common and costly challenges organizations face today. Cash flow makes or breaks companies. It allows you to meet your financial obligations while also providing a way to plan for the future.
If your company is suddenly struggling with your own financial obligations, that could be a clear indication that you’re having cash flow problems. There are other potential reasons for this, such as overspending or poor planning. However, if your accounts receivable are growing at the same time, that’s likely a huge target to focus on.
Reliance on credit lines or loans to cover those shortfalls is also an indication of this. For example, if you’re relying on supplemental income to cover the cost of payroll or having to rely on a line of credit to purchase inventory, that’s an indication of a clear problem with your cash flow and accounts receivable.
Tracking data such as how many accounts are moving from 30 days into 60 days, for example, gives you insight into a cash flow concern. For many organizations, an increased percentage over time of accounts reaching 30, 60, or 90 days late is an indication of not enough follow-up or waiting too long to invoice. Monitor this percentage over time as a clear indicator that there could be a concern (and act on it prior to the number of 90-day lates increasing.
Keep in mind that the longer it takes for your business to get paid – even if they eventually pay you – the less profit-focused that is. The amount of man hours and ongoing investment loss due to that lack of accessible cash flow virtually costs your organization money.
This has a direct impact on financial statements and business valuation. Reducing those percentages requires understanding why they are late (are they not receiving notices, or are clients receiving too much credit for their means?).
It’s a misconception that clients view more time as a benefit when it comes to paying debts. The longer the debt is maintained, the more expensive it becomes to the customer (as well as the client). That makes it difficult to manage your day-to-day activities as well.
If a customer does not receive an invoice on a consistent basis, for any reason, and your team must approach them in person for nonpayment when they try to make an additional purchase, that’s difficult for all involved. Even when this type of transaction occurs over the phone or the internet, people do not like the conflict of not making a payment.
What ultimately occurs can be complex. Frequent disputes and renegotiations about payment terms make communication challenging. People begin to become frustrated with the interactions, and ultimately, they find another provider.
This leads to reduced trust and collaboration. When your key clients are missing payments, even though you know their business is thriving and their needs are being met, that creates a challenge for every management team member who has to now person more aggressive measures or turn the account over to a collections agency. That tends to sour relationships as well.
Another indication that late payments are hurting your business is a drop in your borrowing availability. As a company, if you cannot make payment on your accounts, it will cost you dearly and in numerous ways. Your creditworthiness is complex to begin with, but consider what happens when lenders and key loan available dries up.
Your cash flow issues are likely to lead to struggles to pay your own bills. That leads to higher costs for borrowing when you need it. Credit facilities become strained. Ultimately, this puts significant financial pressure on your business itself.
We’ve alluded to this already but it is a critical factor in making the decision to improve accounts receivable management. If your collection costs are on the rise, that indicates someone is not making the right decisions at the best time. This leads to financial loss for your organization.
There’s increased time and resources spent chasing payments, which (as always) reduces the value of those collected payments. If you turn to collection agencies, you’ll notice costs rising as more accounts end up in collections. There is also the risk of increasing costs related to legal actions you are forced to take.
All of this stems from not collecting payments early enough. If you believe that client relationships will be hurt because of your effort to pursue payments, that in itself could be the flaw costing your business.
Consider a few important statistics that indicate the real financial risk that comes from late payments:
The sooner your company makes changes to accounts receivable management, the faster cash flow issues will be resolved. Knowing how to do this isn’t straightforward for many organizations, especially those significantly high percentages of late payments already in place. Consider these strategies:
With Chaser, you gain the ability to reduce the cost of collecting late payments, safeguard client relationships, and minimize financial loss due to low cash flow. The bottom line is that every company today needs to find a way to reduce how often payments are late, and automation is the simplest, most effective way to do so without the concerns of strained relationships or awkward conversations.
Learn more about how Chaser can automate the process reduce the burden on your team, and improve your business’s financial health. Book a call now to learn more.
Strains to cash flow can become an immediate concern. As payments become later, it diminishes the value of that payment, further hurting companies and increasing their debt. Creditworthiness is impacted and ultimately companies struggle to meet their own financial needs.
The first step is to set clear payment terms from the onset. To reduce the friction between making payments on time, set up timely reminders and provide multiple payment options.
Chaser automates invoicing and collections, saving time, reducing errors, and improving cash flow management. It protects client relationships and fosters company growth.
Routine reviews are critical. It is best to do this at least one time per month. Doing so allows you to identify issues early and offer solutions sooner to minimize long-term, ongoing late payments.
Yes, consistently late payments will lower your credit score as it impacts the financial stability of your organization. That makes it much harder for you to borrow at favorable rates.