How better invoicing and cash application leads to faster collections

Calling customers and trying to get them to pay as timely as possible is difficult enough. It becomes more difficult when there is a flaw at the beginning of the process. Either the customer hasn’t gotten the invoice or the invoice is incorrect.

Before we can expect a customer to pay, we first have to bill them properly and deliver that bill to them on time. Once we bill them, we need to make sure we apply their payments in the way the customer intended. Misapplied payments can lead to time spent trying to reconcile an account, which can include having multiple checks unapplied and re-applied.

Making sure your invoice gets to the right person (or portal) is vitally important to making sure you can collect on a receivable in a timely manner. I think everyone in collections can relate to hearing their accounts payable (AP) contact say, “I don’t have a copy of that invoice, can you send it?” While I am sure that is a legitimate request many times, we also know it is frequently used as a time wasting measure.

If it's a time-wasting measure, the best way to handle it is to remove that possibility. Check how they are receiving invoices.

Sending an invoice through the mail?. Make sure you have the right address and identify if an invoice needs to go to the ship-to, bill-to or other location. If a customer receives an invoice electronically, check to make sure you have the right email address. Correct any misinformation then and there with your customer on the phone. When you have all the right information and confirm it with your contact, you’ll find, miraculously, the claim of not having an invoice will no longer be used.

One invoicing problem that negatively affects collections is that many customers do not “start the clock” on an invoice until it is received or entered into their system. With traditional mailing of invoices, this can put you back a week or even longer.

A self-service portal, or an automated invoice solution for portals, is a great way to cut down on the time and effort it takes to invoice customers. The customer receives the invoice more quickly and there is an audit trail that allows you to know your invoice was received. Billtrust’s Collection solution also allows you to link invoice copies right to your collection correspondences. By modernizing your invoice delivery, you remove a time-wasting tactic and “start the clock” sooner.

Even if you do deliver invoices on time, they still need to be correct.

You got the invoice to your customer in an easy and timely manner, you called and procured payment, and the payment is received – end of story, right? Well, not always. Many times, remittances that are sent are incomplete. They may have incorrect invoice numbers or reference numbers that don’t align with the information in your company’s ERP. They may be paying off an outdated statement, including closed invoices or credits, or there may not be any kind of remittance at all.

All these potential issues become problems that need to be addressed by the collections department. Instead of contacting customers for payment, the collections team is spending time reconciling accounts. This can become time-consuming and frustrating for both the collector as well as the customer. Depending on the company’s structure, it can cause a reliance on another department – for instance, Cash Application – to get the information and have the payment reapplied.

If a check is applied incorrectly, then it means a customer would be receiving statements that are also incorrect. They could think that open invoices have been paid and ignore invoices that show open, since in their system they’re closed. Eventually, a good collector will get this uncovered, hopefully sooner rather than later. But, the reality is that sometimes these issues tend to linger which could cause an account to age artificially.

Now you’re contacting a customer on an invoice that they show paid, but you show severely past due. As with all contacts made for aging invoices, you create a great sense of urgency and use a tone that is appropriate. Your contact may include some consequences if payment isn’t received. This may lead to a bad customer experience. They probably won’t react well to ultimatums being given for invoices that they show as paid.

Even correcting that problem can still lead to further customer dissatisfaction. Having a check applied correctly will lead to improperly closed invoices now showing opened on the account. A customer may have reconciled your statement to their system and removed said open invoice. Now, they're getting statements showing that invoice opened again after months of it not appearing. The situation can be handled professionally, but it is still causing undue stress to your customer relationship.

One of the worst things you can do is misapply a customer’s payment. Some of the most contentious calls I have had to deal with in my career centered on misapplication of payment. It doesn’t matter to a customer if the misapplication was a genuine mistake, or the error was caused by an (incomplete/incorrect) remittance.

When a customer makes a payment, they expect it to be applied in the manner in which the remittance states, as well they should. Of course, it is sometimes inconsequential to them, the completeness, accuracy or clarity of that remittance.

Even with the confusion caused by the scenarios I described above, they are pretty straightforward when it comes to payment misapplication. The situation can become more complex when deductions and debits are part of the equation. Credits that are mistakenly used in cash application are then legitimately taken by the customer. Open cash that couldn’t be applied is left on the account and used, and then no longer around when it’s identified which invoice it was originally meant for.

The more deductions and debits created on an account, the more complex and disastrous the consequence of a misapplied payment can be. An account filled with debit memos and corresponding credits based on legitimate deductions are hard enough to reconcile, but when you add in debits and credits caused by misapplied payments it can be a nightmare. It is extremely difficult when you try to wade through dozens or even hundreds of transactions that are incorrectly open on an account.

Collections are greatly affected by all elements of the order-to-cash cycle, invoicing and cash application included. Until the customer gets the invoice delivered to them, the collections process cannot be started. Any delay in invoice delivery or accuracy will lead to delays in how quickly that receivable can be collected. It's important that your method of invoice delivery is timely and accurate to ensure that the customer receives their invoice in the proper manner.

Making sure payments are applied correctly is equally important. Having a solution like Billtrust’s Cash Application will cut down the errors in payment application as well as handle exceptions. With more accurately applied payments, the collections department can concentrate less on reconciliation caused by errors, and concentrate more on collecting open receivables. With improved invoicing and automated O2C cash applications, you enable your collections department to be more efficient.

Incorrect invoicing and cash applications create disputes; I will cover disputes in more depth in my next blog.

The role of the CFO and the background expected of the “next generation” of CFOs are evolving in surprising ways. At our upcoming Billtrust Insight 2022 conference, explore the CFO’s Office of the Future, as we unveil a new study that will provide key insights into the changes underway, and how these will impact organizations today and for years to come.