5 Methods You Can Use to Reduce Late Payments
Maintaining a steady cash flow is essential to running a business, but keeping a steady revenue stream is more challenging than it sounds. According to a PYMNTS report, 93% of companies experience late payments. Payment delays pressure the accounts receivable (AR) team and accounts payable (AP). Delayed payment can mean straining vendor relationships, missing out on an early payment discount, and weak cash flow.
In other words, when a company receives late payments consistently, day-to-day operations and overall progress slow down. But you can avoid a potential overdue payment and bad debt in the first place. Healthy cash flow boils down to streamlining your process, starting with your customers.
By understanding why your customers are paying late, you can take steps to create an actionable plan to reduce late payments and thrive as a business.
Here are 5 easy-to-implement methods, including automation, to limit late payments from your customers.
1. Digitize your invoices.
Let's face it: It's unlikely that a customer will send a timely payment with traditional paper invoices. Sluggish, unpredictable mail deliveries and lengthy payment processes all contribute to overdue payments. And that's before we add incorrect invoice details, missing information, or time spent sending payment reminders.
Then consider an interactive, digital invoicing. Your customer receives an invoice in their email. They are directed to a portal where they choose their payment option and submit their payment. No printing, no envelopes, no mail carriers, no lost papers.
When switching to electronic invoicing, you can also cut costs. In fact, digital invoicing can cut costs by up to 70%. Moving payments to the digital world also creates a better experience for you and your customers – helping you get paid faster in just one click.
2. Offer incentives for paying early.
Early payment discounts are a great way to avoid late payments. In addition, they allow your customers to save money and build business credit. You get paid sooner and can access the cash needed to handle your day-to-day business expenses.
You can also supplement this approach with late payment charges. Tacking on an additional late fee for missed payment or outstanding invoice encourages payers to at least pay on time, if not earlier.
3. Implement a strategy: Use root cause analysis to understand your AR issues.
Instead of analyzing each late payment, look for areas of improvement within your entire accounts receivable system. Consider using root cause analysis, a systematic process of identifying and solving root causes of problems. There are five steps to this method.
- Gather your evidence by looking for who is involved in your AR system, the current standard procedure, any tools or systems you use, and the general work environment. Looking at the evidence first allows you to make an educated proposal later.
- Write your statement using the data and evidence you gathered. In this step, try to figure out whether the problem lies within your AR system.
- Identify cause and effect and explore the circumstances under which they interact to find the root cause of your problem.
- Create solutions based on the causes you uncovered. A good solution is effective and implementable, has a positive effect, and does not cause other problems.
- Build reports beginning with the identified causes and ending with the implemented solutions. Reports help you keep track of your progress and the effectiveness of the solutions.
The root cause analysis will help you solve your late payments problem because it attacks the issue at its core. By improving your AR system, you will offer your customers a more streamlined payment process and generate growth for your own business.
4. Automate your invoicing process.
Automated invoicing eliminates the tedious, manual task of sending out every invoice, following up with clients, and keeping track of payments. Instead, cloud-based software handles your invoices end-to-end. In fact, companies using automated workflows see a 90% improvement in invoice processing time.
Automatic payments don't just accelerate your processes. It also ties in with digitizing invoices and makes paying easier for your customer. Depending on your payment platform, your customers may be able to automate their payment process with recurring or subscription payment options. This process is simple: A customer's preferred payment method is securely saved, stored, and charged according to payment terms.
5. Communicate well with your customers.
You can also avoid late payments by keeping regular contact with your customers, sending prompt invoices for goods/services provided, and even sending pre-invoice reminders. Sometimes, customers may be prone to falling behind schedule, so all it takes is a simple check-in now and then. By developing a good relationship with your customers and providing them with a reliable payment process, you will increase client satisfaction and get paid faster.
Reduce Late Payments and Invest in the Payments Process
The payment process depends on two parties: you and your customer. By strengthening your relationships, offering streamlined services, and understanding your customers and current AR system, you can lower the number of late payments you receive from your customers.
If you’re interested in learning more about using root cause analysis and turning your AR system into your greatest asset, check out our newest eBook.