The struggle of late customer payments
A guide to improving your collections process
DEAR STAGE 2: We’re running into a collections problem where customers are consistently paying late and creating a cash crunch for the business. We outsource our finance function and are trying to figure out the best way to address but have limited resources to throw at the problem. How do other startups deal with this? ~Crunched for cash
DEAR CRUNCHED FOR CASH: In 2024 cash is king and late payments can be a huge drain on a startup, especially if you also anticipate a risk of non-payment while you’re still doing work on an account. Here are a few ideas to drive a more efficient and effective collections process for your business:
Run an AR aging report and share with your board
If cash flow is a critical metric, put it front and center and make it a priority. Create a slide in your board deck that shows AR aging. This should be a simple report from your GL to show outstanding/unpaid invoices categorized into 0-30 days, 30-60 days, 60-90 days, 90 days+ overdue. Monitor this each month to see if you can consistently improve the trend. You should also highlight the largest customers that are overdue and those that you believe are at risk of not paying (ex: non-responsive or never went live.)
Understand the cash flow problem
Ask some questions to get to the root cause of this issue:
How frequently are you experiencing this challenge? 1% or 30% of customers/revenue?
Are there any patterns in who is not paying on time? Ex: enterprise customers are consistently 30 days late but always pay, or credit card expiration is driving 10% of the delinquent accounts.
Do we have billing contacts identified at each account? Or are we emailing or business champion re: invoices?
What has worked to collect overdue customers in the past?
Document your current collections process (by segment)
If you haven’t done this already, start by documenting your collections workflow.
What happens when a customer is overdue and who is responsible? Keep asking “what happens next?” until you have a complete flow chart of your process.
Then ask “How should this change by segment?” You will likely take a different approach with an SMB customer paying with a credit card monthly and an enterprise customer paying up front for an annual contract via an invoice.
Finally, define when you will write off an unpaid account.
Make changes to your collections process
From here you can start optimizing. A few ideas every company should consider:
Consolidate collections under one person vs. asking each of your AEs and CSMs to drive this process with their own accounts. They may help (more on this later), but one person should design the process, orchestrate the touchpoints and report on progress for consistency.
Make sure that your sales team is collecting a billing contact during the sales process. A billing contact should be called out in the contract to receive invoices and that person/alias should be noted in your CRM separate from the business buyer.
Automate anything you can as volume grows. This spans emails triggered based on overdue emails, follow up sequences, alerts to CSMs/AEs if you need support driving collections through the champion, etc…and include human touch only where needed. Ex: after 3 notices from a billing alias, have the AM/CSM reach out to their business contact with a cc to the billing contact.
Incorporate payment into your compensation plans. How is your sales team paid? If you pay on bookings or billings, but have a consistent AR aging issue, it’s time to consider shifting your comp plan to payout based on collections to align incentives – the rep does not get paid until the company gets paid.
As a last resort…turn off service. This is often viewed as aggressive or contentious, but you can do this respectfully and often just the mention can create urgency to figure out payment issues. Letting your business contact know you haven’t been paid in X days, can’t keep providing service for free and have Y days to correct this can be a catalyst.
Interested to hear if others have ideas on this one - what has worked for you?
Until next week!
Hi Liz, this is a great article, thanks for sharing!
Depending on the type of customers you have, manual/personal touch might be required, and that's where it's getting complex as you need to involve multiple stakeholders, both on your side and the customer side.
I would also add that payment method optimization (how you get paid) is often overlooked, and incorporating this into the contractual phase can have a drastic impact on cash collection performance. Try to get as many customers on autopay is a good idea, but takes time :)
We wrote about some basic and more advanced strategies on cash collection here: https://upflow.io/blog/inside-upflow/maturity-stages-of-cash-collection Would love to hear your thoughts!
We've done all of this and have almost zero late payments and almost zero unpaid bills in 8 years.
The big thing I would add here is that you need to diligently follow up on invoices from the moment they are due through a combination of automated notices, emails and even phone calls.
We've seen ~10% of our annual revenue in unpaid invoices come and go when we've executed on this and when we haven't. The follow up and constant reminders is costly for the business but it makes a HUGE difference and it's less costly than paying 10% interest on a Line of Credit to float 10% of your revenue for perpetually late payments.
On $10M in revenue, that would be $1M of cash you don't have in the bank and $100K of interest if you need to use your Line of Credit to find it.