Cash collection is a fundamental business activity that affects a company's liquidity, customer satisfaction, and overall competitiveness. Despite its critical role, collecting cash remains a persistent challenge for many small & medium businesses (SMBs).
The issue of overdue payments, unresponsive customers, and cash flow problems can significantly affect a business's bottom line and impact its ability to operate effectively. To address these challenges, businesses must develop and implement effective cash collection strategies.
In this article, we will delve into the significance of cash collection and how to manage the process efficiently to achieve optimal cash flow management.
What is cash collection in cash flow management?
Cash collection refers to the activities and processes involved in collecting cash payments from customers for goods and services provided by a business.
The collection of funds is a fundamental aspect of cash flow management. Ensuring that payments are collected efficiently is essential for maintaining sufficient liquidity to meet financial obligations. By promptly collecting payments, businesses canreduce the risk of delayed or missed payments, which can significantly impact their cash flow.
Cash collection strategies
Wondering how to collect cash collection? Some key best practices to consider when implementing a strategy to convert invoices to payments include the following:
Establish payment terms: Clearly define payment terms with customers, including due dates, acceptable payment methods, and any late payment penalties.
Offer incentives: Consider offering incentives to customers who pay early or on time, such as discounts or preferred pricing.
Use technology: Utilise technology solutions to streamline the process, such as electronic invoicing and cash flow management software.
For instance, you can improve your collections by 30% through Agicap’s Cash Collect software, which centralises receivables management and automates payment reminders, escalating follow-up tone and channels to induce payments.
Monitor accounts receivable: Regularly review accounts receivable to identify overdue payments. Follow up with customers on their payment status to remind them of their outstanding invoices and address any issues or concerns.
Provide multiple payment options: Offer various payment options to make it easy for customers to pay. This can include credit cards, bank transfers, cheques, or cash payments.
What is the point of cash collection?
The primary role of cash collection is to ensure that a company receives payment for its goods or services. However, there are several other roles that cash collection plays in SMBs, including:
- Improving cash flow: It helps improve cash flow by ensuring a company has enough cash to meet its financial obligations.
Optimising working capital: Streamlining accounts receivable processes and improving payment collection cycles can optimise working capital, reduce financing costs, and enhance profitability.
Minimising bad debt: Effective payment collection practices can help minimise bad debt by identifying customers who may have difficulty paying and addressing the issue before it becomes a problem.
Strengthening customer relationships: By following up with customers on their payment status and addressing their concerns, a company can strengthen customer relationships and increase customer loyalty.
What are the steps in cash collection?
Typically, a cash collection process involves the following steps:
- Tracking accounts receivable in real-time: The first step in cash collection is to continuously monitor your receivables to identify overdue invoices and assign them to employees to commence collection activities.
- Sending periodic reminders: Customers are sent timely reminders in the form of phone calls, emails, and dunning letters at fixed intervals when the payment is long past due.
- Offering better terms: To encourage quick payments, clients can be offered alternative arrangements such as instant payments or better payment terms. Any transaction-related disputes or discrepancies should also be resolved at this stage.
- Monitoring customers paying under settlement agreements: Those paying under arrangements should be reviewed on a continuous basis to ensure they stay on top of their payments. Their credit limits can also be adjusted in alignment with their business history and payment situation.
- Hiring collection agency’s services: After exhausting all in-house collection methods, the company can put its non-paying clients on a credit hold list and hire a collection agency to recover the dues.
- Suing the client: When all alternatives fail, businesses can file a lawsuit against their clients to reclaim all debts. The outstanding balance may also be written off at this stage.
What is cash collection in accounting?
Cash collection accounting is critical for any business to ensure that cash is received and recorded accurately. It generally involves tracking and reconciling customer payments with outstanding invoices, identifying discrepancies, and taking appropriate actions to resolve any issues.
By maintaining accurate cash collection accounting records, businesses can improve their financial performance, identify opportunities to increase cash flow and make informed decisions based on reliable financial information.
Cash collection formula
The cash collection formula is a calculation companies use to estimate the amount of cash they expect to collect from customers within a certain period.
The formula is:
 | Cash Collections = Opening Accounts Receivable + Credit Sales - Closing Accounts Receivable |
Cash collection methods
There are several methods SMBs can use to collect payments from customers. Here are five common methods:
| Cash Collection Methods | Description |
|---|---|
| Direct Debit | Authorise your customer to pay you directly from their bank account. |
| Credit Cards | Allow customers to pay by credit card, which can be processed quickly and securely. |
| Bank Transfers | Customers can transfer funds directly to your bank account. |
| Cash on Delivery | Collect payment when delivering goods or services. |
| Online Payment Platforms | Use online payment platforms such as PayPal to accept payments. |
Cash collection services
Cash collection services are third-party services that help companies with their cash collection processes. These services can include credit control, debt collection, and invoice factoring.
Credit control services help companies manage their accounts receivable by monitoring payment terms, sending reminders, and chasing overdue payments. 
Debt collection services help companies recover unpaid debts from customers who are unwilling or unable to pay.
Invoice factoring services allow companies to sell their outstanding invoices to a third-party company in exchange for cash, allowing them to receive payment immediately instead of waiting for customers to pay.
Cash collection example
To better understand how the collection of cash works, let's consider an example.
Imagine you run a small retail business that sells clothing and accessories. You have several regular customers who buy from you on credit, and you offer them 30-day payment terms. At the end of each month, you generate invoices for the sales made during that period and send them to your customers.
To collect cash from your customers, you follow up regularly on their payment status, sending automated reminders for overdue payments and addressing any concerns they may have. When payments are received, you record them in your books and update your cash and customer’s account. Finally, you reconcile your bank statements to identify any discrepancies that may creep into your financial statements.
Cash Collection Process
The payment collection process is essential to any business's liquidity planning. It involves implementing strategies and procedures to ensure that customers pay their debts on time, enabling the company to maintain adequate cash flow.
By optimising their cash collection processes, SMBs can improve their financial stability, reduce their risk of default, and ensure they have the funds necessary to meet their operational and growth objectives.
