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, you 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 collection, play an important role.
This is what we call collection management.
What is the definition of a collection procedure? How does technology facilitate operations and increase team efficiency?
Follow the guide and reduce your cash flow gaps 👉.
What is a collection procedure?
Collections management: definition
Collection management, also known as the collection procedure, consists of proactively processing payments from your customers, through various stages:
- creating and transmitting invoices
- monitoring pending payments
- Receiving payments by any means (cash, cheque, bank card, online payment, etc.),
- resolving problems,
- keeping records of financial transactions,
- applying credit policies.
The objective? To collect the payments owed by your customers as quickly as possible, so as not to jeopardise the company's cash flow.
In this sense, the management of collections and the management of debt recovery, while distinct, are intimately linked:
- while the former aims to process and accelerate payments in general (tasks linked to sending invoices, for example) ;
- the second comes into play when payments are overdue and debt collection is required.
☝️ Note that we are talking here about customer collection procedures. The question arises, however, because in accounting, the concept of collection also applies to other cash inflows such as loans, subsidies, tax credit repayments, etc.
Why should you have good cash management?
To begin with, cash management is the key to many cash flow issues.
The quicker your company gets paid, the more it reduces its DSO. And this reduction in average payment time helps to improve working capital requirements. In other words, the organisation is able to finance its expenses in good time before falling into deficit.
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 is 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 optimise your cash collection management?
To identify areas for improvement, you need to know exactly where you stand.
So start by analysing
- The efficiency of current procedures. For example, how automated are you?
- The behaviour of your customers. What payment scenarios do you encounter most often? What are the preferred methods of payment? 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 and with the legal payment deadlines.
☝️ The aim of these observations? To implement a concrete action plan to improve your performance and secure your cash flow.
#2 Closely monitor the status of your invoices
There can be no good cash management without meticulous monitoring of your invoicing.
This monitoring serves 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 to forecast future cash flows, so that you can manage them more effectively.
💡Simplify the task by relying on software that centralises data in real time and automates operations!
#3 Segment your customer base
Another best practice for optimising the processing of cash receipts is to segment your customer base according to their payment habits, and then establish different scenarios.
This way, you can more easily identify individuals who are likely to be bad payers and act accordingly. For example, why not send them a preventive reminder (e-mail, letter, notification, etc.) before the deadline for paying their bill?
In short, it's all about managing 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 is important to get paid as quickly as possible.
Yet many companies have not yet implemented a systematic collection procedure. And yet, the more structured and responsive employees are in carrying out this task, the shorter payment times will be.
This procedure varies from one organisation to another. It is up to each organisation to establish the one that suits it best. However, the following steps are generally followed
- Amicable reminders (by post, e-mail, etc.),
- formal notice
- legal debt collection.
👉 Find out all the details in our article dedicated to invoice reminders.
In all cases, we recommend that you start a dialogue before resorting to legal action. Don't forget that managing collections also has an impact on customer relations!
#5 Automate!
Obviously, all the advice given above is easier to apply if you use systems that :
- automate the various tasks involved in managing collections (reconciling payments and invoices, for example) ;
- Give you real-time visibility of various data.
💡 How do you know if your collections management solution really meets your needs? Once you've chosen it and tested it, measure the results. To do this, look at your previously defined KPIs, such as the cash collection automation rate or DSO.
Which tools can simplify and automate your cash collection management?
As you will have realised, good cash collection management requires the use of dedicated solutions.
Various types of tools can 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.
There are also payment management platforms, which are useful for :
- process payments online ;
- manage different payment methods (handy for giving customers a choice, so you can get your money faster!
- securing transactions.
Finally, there are complete solutions for managing the order-to-cash process, from processing your customers' orders through to collection.
🛠️ This is the case withEsker, a complete order-to-cash 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.
There's also Flowie, a unified platform for purchasing and finance teams working in companies with complex processes, whatever their size. With its powerful technology, including the integration of an AI Copilot, Flowie centralises all order-to-cash management, particularly cash receipts. You save precious time by automating a wide range of operations, from generating your invoices (in line with the purchase orders received) to collection.
Cash management at a glance
Collection management is one of the key activities of your business, since it concerns that precise (and long-awaited!) moment when you replenish your coffers.
Invoicing, monitoring payments, receiving cash, collection... bottlenecks can quickly form if you don't streamline all these operations. And your financial health could be in jeopardy.
Fortunately, technology is still coming to the rescue of businesses. By using the right software, they can automate collection processes and save time. That's how you can reduce your DSO... and increase your cash flow!
Article translated from French