Cash collections will regularly exceed payment terms if businesses do not take a proactive approach to dealing with outstanding accounts receivables.
In many cases, slow cash collection is not the result of poor credit quality of customers or dissatisfaction with services or products delivered. Instead, it can be driven by a lack of communication between buyers and sellers. This is why having a qualified bookkeeper is important for small and medium-sized businesses.
Outside of poor credit or customer dissatisfaction, here are some surprisingly common reasons for invoices not being paid on time.
Common Reasons For Late Invoice Payments
The wrong banking and other information
As many businesses are beginning to pay invoices through electronic funds transfer, having the wrong banking information can delay payment receipt. Mistakes such as incorrect billing details, wrong amounts, or misapplied taxes can lead to disputes or delays, as invoices must be corrected and reissued.
Approval has not been received to pay the invoice on time
This can be a considerable problem for higher-value invoices. Often, invoices require multiple layers of approval, which prevents the invoice from getting to the accounts payable department for payment by the due date if it gets stuck with one of the approvers. Invoices can, for example, get stuck on an approver's desk for weeks while they are on vacation.
Invoices have not been received
If the billing process is manual or poorly managed, it can lead to slow invoice generation and delivery. Delays in sending out invoices can naturally lead to delayed payments. Accounting staff may turn over or go on vacation. This can result in the invoice sitting in an inbox or on someone’s desk for weeks or months without being addressed. In the case of paper invoicing, sometimes the invoice just lands on the wrong desk altogether and sits there until the busy recipient does something about it.
Poorly documented invoicing
Invoices for multiple projects that require approval from several people create complexity in the approval process. For reasons similar to #2, there is a greater chance that the invoice will get held up for payment.
Complacency
Often, invoices land on the desks of managers and are a low priority matter. Managers frequently feel time-pressured, and consequently, paying and approving invoices can be seen as low priority, especially when a vendor does not follow up diligently on late payments. So, as a business neglects to follow up on overdue debts, its customers will be complacent.
Complex Invoice Requirements
Some customers, especially larger organizations or government entities, may have specific invoicing requirements. Failure to comply with these requirements can result in rejected invoices or payment being withheld until corrections are made.
Poor Communication
Inadequate communication about payment terms, due dates, or how to make payments can confuse customers. Lack of timely follow-up on overdue invoices can also contribute to delays.
Lack of Payment Options
Limited payment methods can hinder timely payments. Customers might prefer various payment channels like online payments, direct debit, or credit card payments, and not offering these options can slow the process.
Inadequate Follow-up Procedures
Receivables can become delayed without a systematic approach to follow up on unpaid invoices, such as automated reminders and escalation processes for overdue payments.
How to Improve Cash Collection with Outsourced Accounts Receivable
If you bring in the right outsourcing service provider, they can help you build processes to expedite cash collection. Many businesses fear outsourcing their accounts receivable process will hurt their customer relationships.
The first and most important mindset here is to realize that asking to be paid for your products or services, as long as the communication is respectful, should not negatively impact your relationship with customers. Especially where your customers are businesses, they will understand that cash is essential to your survival.
Most businesses, if not all businesses, have at some point felt the pain associated with a lack of cash, and it is surprising how sympathetic your customers might be to your cash-collecting initiatives.
The next thing to realize is that many follow-up processes can occur directly between your service provider and your client’s accounting department. Many of the matters above can be addressed without being escalated to the senior decision-makers in your customer’s organization.
A service provider may be able to get involved in making phone calls to the accounts payable department of your customers well in advance of the payment date to ensure that the invoice has been received, that the right banking information or payment address is on file, and that the approvals are in place to pay the amount by the due date.
If anomalies are found, your service provider should try to politely remedy the issue with their direct contact. Perhaps an invoice needs to be resent or banking information needs to be provided. If the matter requires escalation, for instance, in cases where the right approvals are not in place or there are disputes over the invoice, then the matter should be communicated back to your team so that it can be resolved at a more senior level.
Regular reporting and communication are critical in this process. Your service provider should develop a standard reporting process to help you understand areas where problems may be on the horizon.
