Chances are, you are throwing significant amounts of cash down the drain because of poor performance around the timing and quality of invoices to customers, and you don’t even know it.

Improving invoicing timeliness is the golden opportunity to improve cash collections, as it is, or should be, within the control of your business to improve, unlike the challenging negotiations required to secure improve payment terms, or to persuade customers to pay you more quickly.  Each day earlier that an invoice is despatched, is a day earlier that the cash will come in.

If your business is deviating from these best practices, it sets the tone that cash is not king, so not only is cash directly impacted by billing delays and issues, but the whole Order-to-Cash process can lose urgency and efficiency.

1. In advance/ in arrears billing

Invoicing once a product has been despatched, or a service has been delivered, is extremely common and follows a logical path.  Invoicing in arrears is not always necessary, however, and if there is an opportunity to invoice in advance, it can be highly beneficial to cash-flow.

For example, utilities and telecoms businesses used to invoice at the end of the month or quarter based on actual usage.  It is now commonplace for this to now be billed in advance, either invoicing a fixed element in advance and a variable amount in arrears, or billing in advance based on estimated usage, with true-ups for actuals being subsequently calculated that adjust the next bill.

Invoicing monthly in advance instead of in arrears improves collections by an average of over 15 days, assuming even distribution through the month.  That would be a huge improvement to achieve in Days Sales Outstanding (DSO).

What opportunities might your business have to change your modus operandi and start to invoice more items in advance?

2. Milestone/ project billing

For industries like engineering or building, milestone billing is common place, whereby you must invest in development or construction over the duration of a project, with agreed milestones at which point invoices may be issued to recoup invested costs.  How these milestones are defined is crucial, in timing, frequency and qualifying criteria.

A clear cash flow profile should be created before any projects are contracted, ensuring that invoices are scheduled early enough, and covering enough value, to maintain a positive cash profile.  Yet even with a theoretically cash-flow-positive plan in place, the contractual milestones need to have carefully agreed terms to ensure that invoices triggers are within your control.

One common example is for milestones to require customer approval of work done, or for certain standards to have been met before invoices can be generated.  This can often lead to customers simply not approving for weeks or even months, severely impacting cash-flow.  With a lack of visibility and complexity of process, this common problem can go unchecked.

One excellent solution is to include a clause within such contracts that approvals or clearly defined objections must be communicated within a clear timeframe, e.g. one week of presentation, at which point the invoice may be validly produced.

3. Scheduled billing days

Does your billing team work to any sort of schedule?  Are invoicing activities typically planned for a specific day of the week or month, for example, or maybe no invoices are issued during month-end close?  Maybe billing is left until Friday afternoons.  In any of these situations, there will be unnecessary delays to receive cash because invoicing is not being done on the first possible day.

The big challenge here is that these schedules may be formal or informal, so often go completely undetected by the business.

4. Consolidated billing

Some customers may request, or already have in place, arrangements whereby they receive consolidated invoices, covering multiple orders, or perhaps to cover a specific period, e.g. a monthly consolidated bill.  This used to be considered beneficial to you by saving administrative costs by processing and posting invoices all in one go.  However, nowadays, invoices are not sent by post, and much of the processing is automated, so there may no saving there, but monthly consolidations give the customer an effective hidden terms extension of c. 15 days, i.e. the average number of days’ difference in the month between order date (or first possible invoice date), and the monthly consolidated invoice.

5. Self-billing

Self-billing arrangements enable the customer to invoice themselves based on consumption, present the invoice to you, often via a portal, and make payment.  In effect, self-billing arrangements are similar to consolidated billing, in that the invoice may be agreed to be produced on a monthly or fortnightly basis, typically, and thus builds in automatically delays between when an invoice can be produced and when it is produced, and hence when payment terms begin.

Self-billing may be unavoidable in some circumstances, particularly when dealing with some extremely large companies, but a clear understanding of the effective payment terms will help as part of commercial negotiations and how cash may be affected.

6. Electronic billing

The excuse of some customers supposedly not being able to accept e-billing just doesn’t wash anymore.  Everybody has email, even octogenarian sole traders, so delays (and the additional cost) from posting physical invoices can no longer be acceptable.  Furthermore, e-billing removes the old excuse of not having received the invoice, as emails are trackable.  Plus, any copy invoices can be sent and received within seconds.

This has become more relevant with the acceptance in many countries of payment terms only starting once an invoice has been received, delaying due date and therefore cash-in.  E-billing ensures payment terms can start from invoice date, and cash can be collected earlier.

7. End of month metrics

Does your billing department have metrics that focus on month-end?  If so, could it be that billing is left towards the end of the month, and then there is a rush to get invoices out before month-end?  Every invoice should be prepared and sent out on the first day possible, without delay, but if the right metrics are not in place, there may be a hockey-stick of billing volume towards month-end, with vast sums of cash needlessly being delayed from coming in.  Because month-end accruals will be zero, or close to zero, no billing delays are likely to be noticed, so the opportunity goes completely unnoticed.

Alternatively, the month-end metrics could lean towards having lower Accounts Receivable or DSO at month-end.  If so, there may an incentive for the billing team to delay the final week of invoices until the new month, thereby growing accruals, which may not be part of their performance metrics, but keeping AR artificially low.

As is so often the case, measuring the wrong or inappropriate metrics, can lead to unintended consequences and impaired business performance that can slip under the radar.  In this case, a lower DSO figure would hide the delayed cash position to the business.

8. Internal invoice approvals

What activities need to be done before an invoice can be raised?  Perhaps some sort of authorisation from another department?  Perhaps prices need to be double-checked and confirmed?  Or perhaps an order is received but the invoice cannot be issued until the inventory is sent, which may be a while after order date, requiring prompt communication from the warehouse to the finance team.

If these keys items, which may be unique for any given business, can be identified, there will almost certainly be delays that were not previously appreciated or understood, that can then be specifically accelerated and measured.  Root cause analysis to eliminate the delays will directly improve the timing of cash-in.

9. Invoicing quality/ errors

Getting any details wrong on an invoice gives the perfect excuse for your customer not to pay, waiting until only you raise the issue before letting you know that the invoice is wrong, and then delaying payment until the invoice has been corrected.  Eliminating unnecessary errors will save time and effort for the billing team, but will also ensure more invoices are paid sooner.

Again, root cause analysis of disputes is necessary to understand the nature and quantum of any billing issues that are then affecting collections timeliness.

10. Invoice date reset

So let’s imagine an invoice needs to be resent.  Maybe the addressee was incorrect, or the email was supposedly not received: the original invoice date must be maintained, in line with expectations of payment terms following delivery of the product or service.  The customer may push for the previous invoice to be credited and for a new invoice to be sent, with a new invoice date, restarted payment terms.  You must be alert to this and resist.

POP Collect provides an unparalleled suite of easy-to-use metrics and analyses as standard, to ensure that cash is optimised across the full Order-to-Cash process, including detailed visuals to understand billing timeliness and quality, and where any cash improvement opportunities may lie.

Contact us for a demo now.