How Does a Company Reduce Average Collection Period?

If your company never seems to have enough cash on hand, the problem may not be a lack of sales. It could be delayed collections. When customers don't get their payments to you on time, you have to pay your bills and expenses out of company reserves. Those reserves can dwindle and disappear if customers regularly pay late. Companies have found useful techniques for reducing the collection period and improving cash flow.

When a company waits for the post office to deliver payments to the door, it can lose one to three days in collecting payments. You can avoid this wait time by using a postal box and giving your mail pick-up personnel a key to the box and authority to make deposits in your bank. You not only avoid office delivery, you save time by having the deposits made on the same trip as when the mail gets picked up.

You can calculate how many days your vendors, lenders, utility providers and leaseholders give you to pay your bills. Then look at how long you give your customers to pay their bills. If you have to pay your expenses before you receive money from customers, that period is called a "float." The solution is to adjust your terms so that you have longer to pay and so that you give your customers less time to pay.

You may find that your collection terms are fine, but your enforcement of those terms is lax. You can tighten up your collection procedures by making sure personnel send letters the moment payments are late, making phone calls to customers who haven't paid and by offering favorable terms or discounts to customers who pay early. This may be a matter of training personnel, or it may require you to purchase accounts receivable software that will track payment due dates for you.

Part of the time you lose on collections may be due to bank processing. If you set up direct deposit with your customers, they can transfer money to your bank directly from their accounts, thus reducing bank processing time. You can set up a bank account that allows for automated clearing house payments. These ACH transfers from your customers' accounts to yours incur no expenses and the money can be available in as little as a day after the transfer.

You may be taking too long to process the checks you receive. You can streamline the process by reducing the number of people who must handle checks. If you track the time that lapses from when you receive a check to when you deposit it, you may find that you are causing unnecessary delays in getting your money. Consider putting a manager in charge of the entire process so that each department that handles a check will be accountable to one person.