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The Value of an Invoice

Understanding the cost of collecting a customer invoice.

29May

I am often surprised when I come across companies and collectors that lack a sense of urgency when it comes to collecting invoices within terms. Offering terms accounts to our customers is in a sense offering free financing. Sure they have to go through a credit review of some sort, maybe offer up some financials or references, but in reality, giving someone 30 day terms is giving them free money. Our business has to float the customer’s purchase of goods or services until such time as payment is due and collected. That can be tough for any business, especially those with cash flow challenges. Taking all this into consideration, timely collections is essential to financial stability.

Every step in the invoice and collection process reduces the face value of said invoice. From the moment the invoice is printed, costs start to accumulate. Every phone call, statement sent, and even cash applied is a cost that has to be considered. Some of this might be built into the initial product price, but it likely doesn’t consider repeat collection attempts, duplicate invoices sent, customer statements, dispute reconciliations, etc. Not to mention the fact that the company loses the opportunity to put that money to use to pay off suppliers, make payroll or even invest in future growth. So the closer we can get the customer to pay at their agreed upon terms, the more cash is available to the business. So how to do we get there?

I try to gear the strategies I create to consider the earliest collection possible. Every correspondence to the customer is considered an attempt. By lowering the number of attempts, we reduce the cost burden on the business. This requires a diligent collection effort and controls that monitor invoices as they rollover into past due buckets.

I also try not to create situations where customers can stall or delay payment by making unreasonable requests. Duplicate invoices are just increased cost, don’t send them. Customer statements are the oldest stall tactic in the book, they don’t need them. Now of course these are broad stroke statements and there are always considerations to every rule, but the leaner the process, the less cost associated with recoveries.

Finally, all processes in place have to work to improve the customer’s experience with the business. Ensuring that the pre and post invoice processes don’t create a negative experience increases the likelihood of timely payment.

Offering terms is a viable business option and necessary to compete in the market, but falling victim to late payments only reduces the value of each dollar collected by the business. Making the investment in an AR model that drives collections as close to terms as possible will pay off in the long run.

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