6 Invoice Management Strategies to Optimize Your Cash Flow
January 10, 2023 |
The C2FO Team
An effective invoice management strategy can improve your working capital access without more debt. Here’s how to stay organized and encourage faster payments.
According to 2022 research by Atradius, a commercial debt collections service, days sales outstanding (DSO) is worsening for a third of companies across all industries in the United States. In other words, it’s taking many businesses longer to get paid for the goods and services they provide.
If this sounds familiar, your small to mid-sized business may struggle to maintain cash flow. While working capital solutions such as business loans can help your business navigate cash shortages, there’s also a more immediate, cost-effective way to gain control over your cash flow: invoice management.
Invoice management is key to maintaining a healthy cash flow because accurate, timely invoices enable prompt customer payments. An effective invoice management strategy gives you better visibility into your cash position and saves your accounts receivable team a significant amount of time and resources. It also helps you build more organized financial records, supporting future funding opportunities. Since most invoice management strategies require clear communication with your customers, they can even promote stronger relationships.
If you don’t have the budget to invest in high-cost cash flow management software or services, there are still a variety of best practices you can leverage right now. Here are six ways to improve your invoice management.
1. Digitize and automate your invoices
Paper-based invoicing processes are still common, with nearly half of businesses using checks to pay their suppliers. Outdated invoicing practices, including the use of Excel spreadsheets, take significantly longer than more sophisticated options such as invoice management software. Sterling Commerce, a research firm, estimates a manually processed invoice costs anywhere from $12 to $30 — whereas top-performing businesses spend only $2.07 per invoice. Manual processes are also slower and more prone to human error, which further delays customer payments and impacts your cash flow.
There are a variety of free invoicing software tools, such as Wave or Stripe, that digitize invoicing for small to mid-sized businesses. These solutions use automation to send invoices faster, detect errors and remind customers about payment due dates. Digital invoicing and payment options also make the process more convenient for your customers, resulting in faster payments. Many invoice management tools provide dashboards and metrics, making it easier to track invoices and make financial decisions.
2. Build an invoice template
Invoicing software usually allows you to build invoice templates, which can minimize delayed payments caused by errors and miscommunication. Invoice templates allow you to maintain consistent data on each invoice, such as the customer’s name, invoice amount, invoice number, payment terms and details about the services you provided.
Not all boilerplate templates will work for your business, so it’s important to create a custom version that includes all the relevant fields. Different customers may require unique templates depending on the services or terms you have negotiated with them. Ensure that templates make critical information clear and accessible at a glance, and consider integrating brand elements, such as your business logo, colors and fonts. Customers are more likely to pay you sooner if they can interpret invoice content quickly and recognize your business as a reputable supplier.
3. Establish payment terms proactively
If your customers see payment terms for the first time on your initial invoice, you could be setting yourself up for delayed payments and strained customer relationships. Agree on terms with customers before any work starts so that you know exactly when to expect payment. At this stage, you can negotiate shorter payment terms or early payment discounts to improve your cash flow.
Many businesses also establish terms for late payments, such as late payment fees, or processes if a customer goes into default. When you’re arranging payment terms, it’s also helpful to clarify who receives invoices. Addressing it to your customer’s entire accounts payable department can cause delays if the invoice needs to be manually redirected to the right individual.
4. Time your invoices strategically
The timing of your customer payments is crucial for increasing and managing cash flow. You can time your invoices strategically both through payment terms as well as your internal processes. For example, if you have a long-term customer contract, negotiating monthly installments and recurring invoices will give you continuous working capital before the project’s end date.
On your end, there are a few other strategies you can use to improve invoice timing. Use invoice management software to send invoices automatically as soon as services are complete. If you don’t use automation, schedule time and set reminders to prepare and send invoices promptly. You can also send invoices at strategic times when your customers are more likely to open emails and make payments. Most email marketers agree that sending midweek, midday emails are the best way to get a recipient’s attention.
5. Closely monitor your accounts receivable
An effective invoicing strategy doesn’t end when your customers receive their invoices. Monitoring your accounts receivable (AR) daily for outstanding invoices is crucial for invoice management and maintaining sufficient cash flow. Getting a pulse on customer payment cadences will help you forecast upcoming payments, make smarter spending decisions and facilitate follow-ups when payments are late.
Accounts receivable monitoring also illuminates areas for improvement in your invoicing strategy. For example, if you’re consistently receiving late invoice payments, you might consider exploring which of your buyers offer early payment programs through providers such as C2FO. C2FO’s platform offers real-time visibility into your outstanding invoices, which is useful for AR monitoring and tracking invoices if your current tools don’t have that capability.
6. Leverage customer-supported invoicing tools
Not all bookkeeping software updates in real time when your customers pay their invoices. However, if your customers use a platform such as C2FO’s, you might already have an easy way to consolidate and track outstanding invoices.
C2FO’s Early Payment program is a working capital solution that allows you to request early payments from customers in exchange for a small discount. While early payment arrangements are not a new practice, C2FO streamlines the process through a user-friendly online platform and with real-time visibility of the status of your invoices. It also uses a dynamic discounting model to give you more control over your cash flow, because you decide which invoices to accelerate and determine the discount rate.
C2FO is implemented by a large network of enterprise buyers. If any of your customers already use the platform, you can simply activate an account at no cost and request early payment on any outstanding invoices. But beyond supporting early payment requests, many businesses also use C2FO to monitor invoices as an AR management solution. This serves as a useful and cost-effective tool if you don’t have the budget for software that tracks and updates the status of your invoices automatically.
Businesses rely on a healthy cash flow to operate and grow, but waiting two months or more for customer invoices to clear accounts receivable can harm your cash position — even when sales are high. A comprehensive invoice management strategy gives you more control over your cash flow and can help you build working capital at a minimal cost. Even if you can’t afford fancy invoice management software, best practices such as consistently using templates and timing invoices strategically, and monitoring your AR so you can send timely reminders, can encourage faster payments from your customers.