Doing business in construction means often facing cash flow challenges, particularly related to invoice payment. And these challenges demand proactive solutions–besides, ineffective cash flow management leads to the failure of 82% of businesses.
Cash flow is what keeps a business alive, and how you manage it plays a pivotal role in whether your business thrives or fails. For instance, an efficient cash flow management strategy can improve your access to working capital without accumulating more debt.
To help, here are some of the top challenges related to invoicing, paired with solutions to streamline and enhance your cash flow management.
Manual Invoice Processing
According to the 2019 Automation Trends Survey, many businesses have up to 500 monthly invoices. Yet, many businesses still rely on paper-based invoicing and reporting. Some still use digital but inefficient methods like using Excel spreadsheets and manual data entry.
High volume of invoices means it’s common for these businesses to dedicate a not insignificant portion of their months to invoice processing, an unnecessary use of resources in this day and age and a glaring drawback of manual invoice processing. The practice is time-consuming and increases the likelihood of errors and inaccuracies. They also increase the risk of losing or misplacing invoices. This not only delays payment to suppliers but also affects cash flow.
Manual, disjointed invoicing also doesn’t provide real-time insights into financial data.
Solution
Automated invoice management systems significantly streamline your invoicing process, reducing manual data entry and the risk of errors. Many free invoicing software tools are available online, which can be helpful for small businesses, with Wave, Zoho Invoice, and PayPal as some of the most commonly used ones.
Automation allows quicker invoice processing, improved accuracy, and real-time access to financial data. Switching to automated systems also enhances efficiency, saving valuable employee time and resulting in faster supplier payments and an optimized cash flow.
An investment in automation leads to long-term cost savings and improved financial management.
Dealing with Multiple Currencies
Businesses that operate across borders or deal with international clients transact in various currencies, which can create cash management challenges. This introduces complexities in managing invoices, as exchange rates can fluctuate. It may also require you to use different payment systems.
Such complexity may hinder accurate cash flow tracking and currency risk management, potentially resulting in higher costs and operational inefficiencies. Handling multiple currencies can also lead to uncertainty in cash flow forecasting.
Solution
Centralized cash management systems help businesses oversee multiple currency accounts through a single platform. As a result, you can see your cash positions in various currencies better, simplifying cash flow and currency risk management.
If you’re receiving international payments, consider investing in accounting software that supports multiple currencies. This simplifies recording and monitoring transactions in various currencies, resulting in efficient financial record management.
Staying updated on the latest exchange rates will allow you to make necessary adjustments to your financial records so they accurately reflect the current values of your assets and liabilities in different currencies.
It may be helpful to leverage payment platforms that manage multiple currencies and offer different payment methods, including credit cards, wire transfers, and e-wallets. They ensure flexibility in receiving payments and catering to diverse customer preferences, it also enhances your ability to manage international transactions effectively.
More importantly, ensure that your finance and accounting teams receive comprehensive training to handle multiple currencies proficiently. Empower them with the essential knowledge and skills to navigate various currencies’ intricacies, including understanding exchange rate fluctuations and compliance regulations. This investment in their expertise enables your team to manage international financial matters effectively, reducing risks and ensuring accurate financial reporting.
Duplicate or Missing Invoices
Duplicate invoices lead to overpayment, and the subsequent recovery process uses up valuable time and resources. Missing invoices on the other hand delay payment, resulting in late fees or strained vendor relationships. Both scenarios also disrupt accurate cash flow forecasting and financial planning.
Solution
Automated invoice verification systems instantly detect duplicate invoices and flag them for review. These systems also help identify missing invoices and alert the relevant parties, reducing the risk of discrepancies.
Additionally, standardizing procedures for invoice submission reduces the likelihood of these incidents. Ensuring that suppliers adhere to your SOP through transparent and clear communication is crucial. Establishing a confirmation workflow also reduces the risk of missing invoices.
Another useful feature in automated systems is digital invoice tracking. This helps streamline the entire invoicing process, from receipt to payment, and enables quick identification of any missing invoices. Digitally archiving and backing up all your invoices also helps reduce the risk of misplacement. In the case of dispute resolution, it facilitates easy access to historical invoices.
Late Payments from Customers
In 2022, a Chaser survey revealed that a substantial 87% of businesses experienced delayed payments, with an average payment waiting period of 34 days. The primary causes for these delays included customers overlooking payments (40%), facing their own cash flow challenges (32%), and disputing the invoice (15%).
If you are a business owner, you know what’s next. When customers don’t pay on time, your expected revenue doesn’t arrive as planned. Late customer payments also require additional time and resources for follow-ups, reminders, and debt-collection efforts. While this is part of the reality for many businesses, ensuring you directly address issues and promote prompt payment is key. Improving your communication skills for an effective debt or late payment collection is essential. This should be a priority for your debt collection and accounts receivable team.
Late payments can further strain your finances if you have limited working capital. Pushing some businesses to resort to less than ideal loans or stretched credit to bridge the gap.
Funds tied up in unpaid invoices are also an issue, representing missed opportunities for business growth. They compromise your ability to manage your business and invest in growth, such as expanding operations, hiring new staff, or launching new products or services.
Solution
To address late payments from customers, ensure your payment terms are transparent and clearly communicated to customers. This reduces the likelihood of misunderstandings and disputes. It’s also advisable to agree on terms with customers before starting any work, which ensures clear expectations for payment timelines. In construction, laws are in place to protect contractors and suppliers. Still, successful construction businesses are masters of communication and relationship building with their clients, which come in handy when facing payment issues.
Preventing late payments involves a lot of forethought. Establish a well-defined collections process.
This is another area where automation is highly effective.From automated reminders to prompt customers about upcoming payment deadlines to digital invoice tracking systems that monitor invoice statuses and promptly follow up on unpaid invoices, getting paid benefits greatly from streamlined solutions.
Always clearly outline penalties for late payments in your terms and conditions, such as late payment fees. This can act as a deterrent for customers who habitually pay late. On the other hand, provide incentives, such as discounts for customers who pay early or on time, encouraging timely payments.
Summing Up
Effective cash flow management is a crucial element of a thriving business. Invoice payment challenges significantly impact your financial health, but with proactive solutions, you can fine-tune your financial operations.
From automating invoicing procedures to addressing late payments, these solutions help you take charge of your cash flow. Enjoy optimized cash flow, efficient financial management, and improved overall success and sustainability!
This is a guest post.