Reduce your DSO and boost your cash flow with effective cash management!
Every company loves to see cash flowing into its coffers 🤑. But before the cash flows in, we have to sell (we'll leave that to our sales friends), and also pocket the money on time. This latter imperative requires a well-honed process in which automation, but also collections, play an important role.
This is what we call collections management.
What is the definition of a collection procedure? How can technology facilitate operations and increase team efficiency?
Follow the guide and reduce your cash flow gaps 👉.
What is a collection procedure?
Collections management: definition
Collections management, also known as collections procedure, consists in proactively processing your customers' payments, through various stages:
- invoice creation and transmission,
- monitoring pending payments,
- Receipt of payments by any means (cash, check, credit card, online payment, etc.),
- problem resolution,
- keeping records of financial transactions,
- application of credit policies.
The objective? To collect payments due from your customers as quickly as possible, so as not to jeopardize the company's cash flow.
In this sense, cash management and debt collection, while distinct, are intimately linked:
- while the former aims to process and accelerate payments in general (e.g. invoice dispatch tasks) ;
- the second comes into play when payments are overdue, and collection action is required.
☝️ Note that this is a customer collection procedure. The question arises, however, because in accounting, the notion of collection also applies to other cash inflows, such as loans, subsidies, tax credit repayments, and so on.
Why should you have good cash management?
To begin with, cash flow management crystallizes many cash flow issues.
The faster your company is paid, the more it reduces its DSO. And this reduction in average payment time helps to improve working capital requirements. In other words, the organization is able to finance its expenses in good time, before falling into the red.
Another objective of good cash management is to maintain good commercial relations with your customers.
By working methodically, you can provide clear invoices, offer flexible payment options... and deploy a collection process that's both efficient and progressive. To satisfy your customers, an amicable solution is always preferable!
How can you best manage collections? Our 5 tips
#1 Take stock of your company's situation
Are you planning to optimize your cash management?
To identify areas for improvement, you need to know exactly where you stand.
Start by analyzing
- The efficiency of current procedures. For example, how automated are you?
- Customer behavior. What payment scenarios do you encounter most frequently? Which payment methods are preferred? Have you identified any problem customers or bad payers?
- Your KPIs. For example, if you want to know whether your payment times are worrying, look at your DSO. Then compare the result with the averages in force in your sector, as well as with legal payment deadlines.
☝️ The aim of these observations? Implement a concrete action plan to improve your performance and secure your cash flow.
#2 Carefully monitor the status of your invoices
You can't manage your cash flow without carefully monitoring your invoices.
This monitoring helps to identify :
- invoices coming due soon, to anticipate delays ;
- late payments and invoices to be dunned, to start the collection procedure;
- invoices to be collected.
At the same time, this work helps you forecast future cash flows, so you can improve cash management.
💡Simplify the task by relying on software that centralizes data in real time and automates operations!
#3 Segment your customer base
Another best practice for optimizing collections processing: segment your customer base according to their payment habits, then establish different scenarios.
This way, you can more easily identify individuals likely to be bad payers, and act accordingly. For example, why not send them a preventive reminder (e-mail, letter, notification, etc.) before their bill payment deadline?
In short, manage customer risk.
#4 Establish and follow a well-oiled collection procedure
As we have seen, collection and recovery are closely related concepts. In both cases, it's important to get paid as quickly as possible.
Yet many companies have yet to implement a systematic collection procedure. And yet, the more structured and responsive employees are in carrying out this task, the shorter payment times become.
This procedure varies from one organization to another. It's up to each organization to implement its own. However, the following steps are generally followed
- amicable reminders (by post, e-mail, etc.),
- formal notice,
- legal debt collection.
👉 Find out more in our article dedicated to invoice reminders.
In all cases, we recommend that you engage in dialogue before resorting to legal action. Don't forget that managing collections also has an impact on customer relations!
#5 Automate!
Of course, all the advice given above is more easily applicable if you use systems that :
- automate the various tasks associated with cash management (reconciliation of payments and invoices, for example) ;
- give you real-time visibility on various data.
💡 How do you know if your cash management solution really meets your needs? Once you've chosen and tested it, measure the results you've achieved. To do this, look at your previously defined KPIs, such as the rate of cash collection automation or DSO.
Which tools can simplify and automate your cash management?
As you can see, good cash management requires the use of dedicated solutions.
Various types of tools help to simplify your processes, starting with invoicing software. These allow you to :
- send invoices to customers in just a few clicks ;
- monitor invoicing status in real time;
- automate reminders.
Payment management platforms also come to mind, useful among other things for:
- process online payments ;
- manage different payment methods (handy for giving customers a choice, so you get your money faster!);
- secure transactions.
Finally, there are complete solutions for managing the order-to-cash process, from customer order processing through to collection.
🛠️ This is the case withEsker, a complete order-to-cash dematerialization software solution for small and medium-sized businesses and major accounts. With Esker, you can fully automate your collection management (reception of multiple payment sources and formats, collection tracking, etc.), while managing exceptions and partial payments. And thanks to artificial intelligence, payment data is automatically extracted and reconciled with the corresponding invoices to save time and avoid errors.
Another example is Flowie, a unified platform for purchasing and finance teams working in companies with complex processes, whatever their size. Technologically powerful, thanks in particular to the integration of an AI Copilot, Flowie centralizes all order-to-cash management, particularly cash receipts. You save precious time thanks to the automation of numerous operations, from invoice generation (in line with purchase orders received) to collection.
Cash management at a glance
Cash management is one of your company's key activities, since it concerns that precise (and long-awaited!) moment when you replenish your coffers.
Invoicing, payment follow-up, receipt of payments, collection... bottlenecks can quickly form if you don't streamline all these operations. And your financial health could be in jeopardy.
Fortunately, technology continues to come to the rescue. By using the right software, they can automate collection processes and save time. Which means lower DSO... and higher cash flow!
Article translated from French