A recent issue of Controller magazine cited inaccurate invoices as the largest impediment to timely receivables collection. If customers pay more slowly than normal due to invoice errors, the delay can be devastating on family business cash flow. For every $100,000 of uncollected receivables, the typical business pays $10,000 per year in loan interest. For medium to large family businesses, the actual cost of invoice errors may be $50,000 to $200,000 or more annually.
Beyond simple cash flow costs, invoice inaccuracies cost personnel hours and computer time and paper in the credit and rebill process. Quite simply, there is an extraordinary savings and cash flow benefit to streamlining and “error-proofing” a billing system.
To minimize errors from your invoice system, review the entire process cycle that takes place in your company from the time of customer order through the final billing. In almost all cases, you will find the more automation you employ in the process, the less likely the opportunity for error. Here are the common invoice errors and solutions for their prevention:
Customer Order Input Incorrectly – At the point of order, either the product, quantity or delivery location is entered into the computer incorrectly. This type of error increases in frequency with the number of people that handle the order. For instance, if one person jots down the order, then hands it to a dispatcher who rewrites the data and then hands it to another person who finally enters the order into the computer, there are way too many opportunities for human error. Solution – the same person that talks to the customer simultaneously enters the order. In addition, the ordertaker always verbally confirms with the customer the product, quantity, and delivery site. In the event a customer orders more product than can fit at their location, business owners can charge the customer for the full amount of product ordered and state this policy on their customer credit application.
Incorrect Taxes – Family businesses who operate in multiple states with various combinations of taxable and nontaxable products report frequent occurrences of tax errors on invoices. Solution – good software. Office staff should only be required to indicate a taxable versus non-taxable sale and the delivery location, not input taxes. The software system should automatically compute the correct taxes. Short of a great software system, personnel training is the only way to avoid tax errors. If all employees understand taxes, you have a better chance of your billings being accurate.
Incorrect Product Price – When you bill a customer at a price in excess of what was quoted, you risk more than an angry customer — you risk losing the entire account to a competitor forever. If pricing errors are the most common problem for your company, you may be “custom-pricing” too frequently. To minimize errors, the margin should be negotiated at account establishment and not require any daily changes.
Invoice Sent to Wrong Address – This usually happens when a customer has multiple locations. Even if the product, quantity, price, taxes and delivery site are accurate, you may inadvertently slow down receipt of your money by sending an invoice to the wrong office. To cure this problem, train your order-takers to confirm the invoice address for the most expedient processing.
To get started towards zero error invoices, enlist the help of your billing staff. Let them know there is no blame, just a breakdown in the process that needs to be corrected as well as the cost of errors to your company.
Examine the most frequently occurring billing errors and identify their root cause. In general, automating your order-to-bill process as much as possible with the help of your general ledger vendor will improve billing accuracy which in turn should facilitate your collection time. And as we all know, faster collection time means better cash flow which means higher profits!
