As a manufacturer your focus is not on accounting, it’s on producing product, managing inventories, bringing in new business, and on the other important activities that drive revenue. While accounting may not be your greatest focus, it’s extremely important to pay close attention to effectively managing accounts receivable. Why? Because companies who focus on collecting what they are owed as quickly as possible are able to increase manufacturing cash flow, which then allows them to invest in R&D, buy capital equipment, offer competitive prices, and take other important steps toward growth.
Late payment is common in the manufacturing industry, but there are ways to change that in your business. First you need to know why customers are paying you late to begin with.
According to the September 2014 Atradius Payment Practices Barometer, an international survey of B2B payment behavior, American manufacturing customers pay late for the following reasons:
- Insufficient funds available to pay at the time the invoice is due: 40.19%
- Dispute over quality of goods/services leads to late payment: 27.57%
- Goods/service provided not corresponding to what was agreed upon in the contract: 28.04%
- Complexity of payment procedure: 30.84%
- Inefficiencies of banking system: 31.31%
- Incorrect info on invoice: 32.71%
- Formal insolvency of the buyer (liquidation, bankruptcy, etc.) : 29.44%
- Invoice was send to the wrong person: 22.90%
- Other: 2.80%
Tips to Reduce Late Payments and Improve Manufacturing Cash Flow:
Do any of those sound familiar to you? If so, there are ways you can reduce the frequency of late payment due to these common causes. For example:
By requiring both new and existing customers to fill out a credit application whenever credit it requested or a change in their credit limit/terms is requested, you can better identify those customers who may be strapped for cash themselves or those who may be in danger of formal insolvency. Be sure your credit application has all of the necessary information, use our credit application template to make sure you don’t miss anything.
Suggested Reading: Best Practices in Business Credit Management
When your customers need to send a check in the mail, give you card information over the phone, and jump through various other hoops to pay you, they will likely put paying your invoice off until the last possible moment. You can take the complexity out of the payment process by allowing customers to pay their invoices online 24/7. With the right A/R software in place, you can send customers a secure hyperlink via email and give them instand access to a customer portal where they can review their statement, download invoices, and make payments online via credit card or ACH.
Being unable to deliver a complete and correct invoice is troublesome, especially since this is an issue for well over a quarter of those surveyed! Furthermore, it makes your company look unprofessional when they send over inaccurate documents and your customers may not want to do repeat business with you because of it. So, why are your invoices reflecting incorrect information? Most of the time it’s because the invoice amount is incorrect or because the PO is missing or incorrect. These inaccuracies can happen when you’re forced to use multiple systems to manage accounts receivable; for example, when users are required to enter data into both an ERP system and a spreadsheet or disconnected accounting system.
How are you managing accounts receivable today? Learn about the pros and cons of different accounts receivable management strategies.
Sending the invoice to the wrong person or department delays payment because whoever winds up with the invoice on their desk (assuming it makes it to a desk) may forget to pass it along, throw it away, or put it in their “I’ll deal with this later” pile. Meanwhile the invoice due date is approaching and no moves are being made to pay that invoice. In some cases your customer may contact you asking why they have not been billed (they get a gold-star) while most will just let things go until you bring it up.
To avoid sending the invoice to the wrong place, be sure you check to make sure your contact information is correct when you speak with customers. You may also want to call your customer a day or two after they should have received the invoice to verify that it did successfully make it to them. At that time you can address any potential issues or questions about the invoice, getting yourself one-step closer to getting paid on time.
While improving A/R management may not help you avoid disputes and late payment related to the quality of goods/services or banking inefficiencies, we are confident that you can improve manufacturing cash flow with the above tips- we’ve seen it done by our customers! To learn even more tips, tricks, and best practices to reduce costly invoice disputes and increase cash flow, download the white paper below.