manging-cash-and-trade-creditRohit Arora, CEO of Biz2Credit, published a great article last week on Fox Business’ Small Business Center: 5 Tips for Handling Cash Flow Peaks and Valleys (as seen in HVACR Business Magazine eNewsletter). Every business – from mom and pops to multinational organizations – confronts cash flow challenges.

In my experience of working with companies of all sizes it is true that they all have pretty much the same cash flow experiences. Sometimes things are up and sometimes things are done. Further, and interestingly, regardless of a company’s size, the solutions to cash flow “peaks and valleys” are the same. The difference is simply the scale of the problem or solution.

Arora’s 5 Tips article provides a great overview of what businesses can do to handle cash flow changes.  So, what is his number one tip?  It’s to “Manage Receivables Well.”  This article explores how.

Part I: You Must Invoice Intelligently

Arora’s discussion of managing receivables well relies heavily on a discussion of the invoicing processing, and does a pretty good job of calling attention to the high level issues related to that process. The invoicing processing is extraordinarily important to managing receivables overall. Just as a good collections process depends on a strong front end credit policy, so too does getting paid consistently rely upon a strong front end invoicing process.

A few months ago we touched upon this topic in “Accounts Receivable Management for Construction Industry Controllers.” Part III of that article stressed that companies should send “smart invoices.”

What does this mean?

Sending “smart” invoices boils down to doing two things: (1) Leveraging technology to send invoices in a way that increases delivery success and encourages payment; and (2) Using data to set intelligent terms.

There are a lot of great vendors and technology products that is making invoicing easier and more automated than ever before.  Small businesses can use products like Freshbooks, and enterprises can use products like BillTrust.  These technologies will make the invoicing process more consistent and will improve your receivables performance by itself.

Then, think through everything about your invoices, from the terms to the little message you send to customers along with the invoice. These small matters can make a big difference, and there is a lot of research out there to help you construct the most effective invoice possible.

Part II: Use Technology To Monitor Your Receivables

The previous section discussed the process of preparing and sending invoices, and now we turn to managing the invoices and expected receivables after the invoices are sent.  What does your company have to accomplish this?

funding-gates-receivable-managerRegardless of whether you’re an enterprise size company or a small mom and pop shop, there aren’t many products out there to help.  Thankfully, the A/R and collection space is finally starting to get some quality technology attention.

One of our favorite products comes from Funding | Gates:  the FG Receivables Manager.  This is an especially great product if you use Quickbooks to manage invoices in your business.

The receivables manager will sync with your accounting data and give you all the reporting and tools you need to collect what’s due to you. It will help you track your collection efforts, and will even instruct you on what to do next (i.e. make such and such phone call).  Great product from great people, and an example of the type of technology your business should be using to monitor the receivables that have been sent.

Part III: Followup With Non-Payers

Someone not paying you?  It happens to every business.  The formula for success at turning these non-paying accounts into cash is the same for everyone, and it requires followup, followup, followup.

This is a huge part of successful accounts receivable management. Everyone in the credit and collections industry knows that the longer you wait to collect on an invoice, the harder it will be. This is what we said in a previous article about following up with non-paying accounts:  “This is a huge part of successful accounts receivable management.  Everyone in the credit and collections industry knows that the longer you wait to collect on an invoice, the harder it will be.”

Of course, this means your company needs to know and decide which accounts to followup on, which is an art and discipline in itself.  It also means your company will know exactly what steps it will take to followup with non-paying accounts.  This is something that would be set forth in the company’s credit policy or collections policy.

As we’ll explore in the next and final section of this article, sometimes the best followup is the utilization or the threatening of your mechanics lien rights.  The success rate can be really high, and the cost really moderate.

Part IV: Leverage Your Remedies, Such As Mechanics Lien Rights

Some customers will pay if you simply make the invoicing process smoother. Some customers will pay if you simply manage their accounts better. Some customers will pay if you followup with a phone call or an email after the account goes into default. As you know, however, some customers will continue to drag their feet.  What can you do?

The answer is that you need leverage.  You need to convince your customer to prioritize your invoice above other accounts they have due.  If they prioritize your debt above others, it will result in you getting paid.

As we’ve explored ad nauseum here on the Lien & Credit Journal, the most effective way to get paid on a construction project is to utilize mechanics lien rights. As to why this works so well, take a look at this article:  17 Ways A Mechanics Lien Works To Get You Paid.

Using mechanics lien rights has a clear and profitable return on investment.  Sending a notice of intent to lien will get you paid in over 50% of cases.  Filing a mechanics lien will get you paid in over 65% of cases.  It’s a no-brainer.