Healthy businesses have optimal cash flow. Learn how to get paid faster and keep your small business healthy.

Good cash flow is a critical component of success for any small business. And one of the best ways to improve cash flow is to speed up the collection of your accounts receivable.

Sometimes small business owners focus too much on increasing sales to the detriment of collecting the money from the sales they’ve already made. The reality is that a sale isn’t really a sale unless the cash has been collected. Until the money is in your small business bank account, a sale is just an interest-free loan to your customer.

Make accounts receivable collection a top priority

The key to improving collections is to make collecting accounts receivable a top financial priority for your business, says Cadence Bank Vice President and Small Business Relationship Manager Salomon Saucedo. He offers the following five tips for improving collection of your accounts receivable:

1. Prepare clear & accurate invoices

The last thing you want to do is give your customers an excuse not to pay. “Sending out invoices that are vague, ambiguous, confusing or inaccurate opens the door wide to possible payment delays,” says Saucedo.

For example, Saucedo says he has seen small business invoices that did not include line item pricing, total amounts due and payment due dates. “When customers have questions about unclear invoices, they often put them aside in a ‘pay it later’ pile until they have time to try to figure it out,” he says. “This wastes valuable days that cash could be sitting in your bank account instead of your customer’s account.”

2. Send automated reminder emails before the due date

Many of us receive auto-reminders from utility companies, letting us know that our water and electric bills are due on a certain date. Do the same thing with your customers.

Auto-reminders can be set up to go out 10, seven and two days before payments are due. “Most customers don’t mind getting these kinds of notices — in fact, many appreciate being reminded about upcoming payment due dates,” Saucedo says.

Some accounting systems make it easy to set up auto-reminders, but more basic systems might not include this feature. Depending on the volume of your accounts receivable, it might make sense to send out such notices manually if you have to. “The potential cash flow benefits can more than make up for the time required to send auto-reminder payment notices manually,” says Saucedo.

3. Offer discounts for early payment

The idea here is to give customers a financial incentive to pay invoices quickly. This is commonly done by offering what’s known as a “2-10, net-30” prompt payment discount.

With this offer, customers will receive a two percent discount on the invoice if they pay it within 10 days instead of 30 days (assuming standard 30-day payment terms). “While there is obviously a financial cost to offering this discount, it can sometimes be offset by the cash flow benefits realized by collecting payment 20 days earlier,” says Saucedo.

When offering prompt-pay discounts, it’s critical to monitor customers’ payments carefully to make sure they are actually paying early. “Some customers take the discount but don’t pay within 10 days, which defeats the whole purpose of offering the discount,” says Saucedo.

4. Be proactive with past-due receivables

This is critical because studies have shown the longer past-due receivables go uncollected, the less chance a business has of ever collecting them. So you should move fast once receivables enter the past-due stage.

One of the most effective techniques is a personal contact by phone or email from the business owner to the customer whose payment is late. This should take the form of a friendly reminder that the invoice is now past due and payment should be made right away. “It doesn’t have to be threatening or confrontational,” says Saucedo. “Often, the customer has simply forgotten to pay the invoice and will make payment right away once reminded.”

Saucedo says owners shouldn’t let personal relationships or friendships with customers keep them from reaching out to them in this way. “I’ve seen this happen, but owners need to remember that it’s business, not personal,” he says. “You have every right as a business owner to expect timely payment from your customers, even if they’re friends of yours.”

5. Institute ACH & same-day ACH payments

This strategy removes the uncertainty of receivables collections by making them automatic. “Setting up your customers on automatic ACH payments is the best practice I know of for improving receivables collections and boosting cash flow,” says Saucedo. “Your small business bank can help you get this implemented for your customers.”

It’s important to send an auto-reminder to customers that payments will be drafted from their account on a particular day. “This will help avoid unpleasant surprises on their end, such as account overdraft charges and cash flow snags,” says Saucedo.

Boost cash flow with Cadence Bank

With these tips, small business owners can shrink the amount of time and resources they spend chasing down payments.

This article is provided as a free service to you and is for general informational purposes only. Cadence Bank makes no representations or warranties as to the accuracy, completeness or timeliness of the content in the article. The article is not intended to provide legal, accounting or tax advice and should not be relied upon for such purposes.