Your business seems to always be in a cash crunch. You are servicing your clients well and have a good business model, but there is something wrong with the cash flow. What is happening?

Cash flow issues can be complicated.  Many times there isn’t just one issue that is causing it. Whenever I hear of this problem, the first thing I look at is the Cash Collection Process. I am talking about all kinds of payments, whether it is by electronic payment, credit card, checks, or even physical currency.

A Good Cash Collection Process

  1. Regularly review unpaid invoices and followup on the oldest invoices.
  2. Bill the client per the contract on time.
  3. Compare billing to a forecast or prior month.
  4. Make it easy for clients to pay by check, ACH, or Wire.
  5. Have a second set of eyes review your billing.
  6. Record all payments in your accounting system.
  7. Deposit checks quickly using remote deposit.
  8. Endorse checks as soon as you receive them.
  9. Have proper dual controls with the handling of physical currency.
  10. Reconcile all receipts to the bank statement.
  11. Reconcile the Accounting system to a 3rd party system if not integrated.
  12. Compare payments in the bank to a credit card processor if not integrated.

Why Does This Matter?

Now you may be reading this and thinking it is overkill, but it does matter. A regular Account Receivable process will improve your cash collections. I can’t even tell you how many times that the invoice was emailed to the wrong place, or it was not entered into the client’s system correctly. By just sending reminder emails, it will improve the payment of the invoice and prevent them from becoming significantly past due. The older invoices get, the harder it is to collect.

Many of the processes above are to ensure that all your systems align with each other and the bank. Everything must reconcile to the bank statement regularly. I have seen companies go months without reconciling, and this keeps them from knowing who has paid or if there are any issues.

Finally, nobody wants to admit it, but financial fraud happens. It happens in business, nonprofits, churches, and everywhere. You have to set up proper controls to ensure that one person is not handling all the recording and reconciling of cash receipts. It is not hard for someone to manipulate this process if they don’t have proper checks and balances. It is surprising what people will do when their financial situation gets tough, and you don’t want them to have an opportunity to take advantage of you. Also, these controls protect them because if there is an issue, it will prevent them from being a suspect since there is no way they could have committed the fraud alone.

Conclusion

Cash Collections is one part of the financial cycle that is improved with sound systems, processes, and financial controls. Next time, we will discuss the proper procedures for all of your cash disbursements. See “How to Improve the Financial Cycle” for an overview.