While the economy is improving these days, many small to midsize manufacturing firms continue to struggle with financial challenges. According to industry analysts, several factors play into this phenomenon - in particular, lackluster invoicing and collection systems, which in turn, choke cash flow and weaken accounts receivable columns.
On a positive note, the same experts are quick to point out that strategies for bolstering and stabilizing cash flow do exist. The key lies in paying close attention to the basics as they apply to the invoicing process - from sending the bills to posting the payments.
The Nuts and Bolts of Billing
Research shows that time and again, owners of small- to medium-size manufacturing businesses struggle with getting customers to pay up - on time or at all. While no single method can solve this problem in every case, a number of tactics can pre-empt delinquent situations.
- Extend credit carefully. In the case of large or costly orders, all customers should complete a credit application, including reference information. If possible, manufacturers should ask owners of small or fledgling businesses to personally guarantee their orders. This strategy increases likelihood of payment when the customer is in financial straits, because personal property is at risk.
- Bill before delivery. Employing proactive invoicing methods can ensure that a portion of money owned will find its way into the cash flow cycle, even before the final shipment of goods: When the fabrication of a product requires a large upfront investment from the manufacturer (steel parts for farm tractors, for instance), milestone billing allows the factory owner to invoice his customer for a portion of the total sale upon ordering parts or completing an operational phase.
Progress billing enables the manufacturer to invoice costs on a regular basis as they are incurred. In a sense, the customer finances the inventory, thus providing sufficient working capital to maintain a consistent cash flow.
While more prevalent in the construction industry, sub-line-item billing can apply to very large or complex products that must be manufactured in sections. Invoices go out upon completion of each component.
- Establish clear payment guidelines upfront. Experts say it’s critical to set minimum payments, discounts, due dates and penalties in contract form. The idea is to have a legally sound document in place if an account becomes delinquent.
- Don’t give customers reasons not to pay. Common sense dictates that satisfied clients are more likely to fulfill their obligations. For this reason, the business owner must take affirmative action when problems come up with production or delivery. Keeping in touch with clients during lengthy manufacturing cycles; reporting progress (or lack of it); readily admitting problems and proposing solutions, just may assure full payment.
Tuning Up Receivables
By definition, an accounts receivable system includes money due or anticipated from all clients for goods or service billed on credit. On a balance sheet, the total entered appears as an asset.
That said, a system is only as accurate as the person maintaining it. When payment tracking is off, or figures don’t reconcile with the general ledger or bank statements, the resulting faulty records can impede cash flow, or even undermine a company’s financial soundness.
Experts suggest a number of tactics for getting the accounts receivable column where it should be. Here are a few:
- Age all receivables. This simply means examining the records to ascertain how long an invoice has remained unpaid. Research indicates that business owners who allow accounts to fall 90 or more days delinquent will garner less than 50 percent of them. Begin collection procedures on the largest amounts first in order to bolster cash flow most quickly.
- Keep accurate balances. Make a habit of checking accounts receivable records against financial documents, such as invoices.
- Bill regularly. The posting of receipts in a timely manner is well-near impossible when a customer doesn’t pay up because he got the bill late. Establish a cycle where invoices go out the same day every month, with amounts and due dates clearly stated.
- Create reports. By documenting and analyzing accounts receivable activity, business owners will find it easier to monitor customer payment records, as well as get a handle on credit-limit standing.
- Promptly post all paid bills. Once again, this gives the business owner a clear picture of who is sending checks and when they are coming in.
- Reconcile all financial records. The accounts receivable page should match or dovetail with general ledgers, sub-ledgers and other financial statements. A number of inexpensive software packages - some designed specifically for manufacturing firms - are useful tools for completing this task, as well as most others that involve accounts receivable functions.