Cash flow shortages are a challenge for many small businesses. One way to relieve the pressure for cash is through better management of company receivables. Here are some ways to tighten control of your cash.
Set your policies
Before you make a sale, you need to set your billing policies or your customers will set them for you. If your product or service goes out the door without payment, you are essentially lending money to that customer. Are they worthy of your credit? Prevent problems by asking for credit references. Then, take the time to call those references. Are they listed in Dun & Bradstreet? Ask why they left their last vendor (perhaps they have a string of unpaid vendors ahead of you?) Be cautious and firm and follow your gut instincts about a potential customer. More than likely, your instincts are right on the mark. Trust them.
Time your invoices
Make it a policy to never let a job or product leave your business without an invoice. It may seem like an inconvenience, but your collection rate will improve dramatically. There are several reasons for this.
- First, it is easier for a customer to relate the value of your product to the price you have charged. As time goes by, other needs crop up for the customer and you are no longer a priority.
- Second, if your customer receives your invoice weeks after they have received your product, they may feel that there is no reason to pay quickly. In their minds, if you can afford to wait to bill them for weeks, you can also afford to wait several more weeks for them to pay.
- Finally, staying on top of billing evens out your cash flow. Instead of billing once a month (or when you are desperate for cash) and waiting another month to get the money, you will have money coming in on a steady basis.
Consider a retainer, a deposit, or COD
If a customer has proven to be a poor payer, ask for a retainer. Do not be embarrassed. They were not embarrassed about owing you money all the time. Why should you be now? You can simply say, "Based upon your past credit history with us, we will need X amount in advance and the remainder when the job is completed." Or, type up a payment agreement, have them sign it, and then give them a copy. It is harder for someone to put off paying when they have a signed agreement in their hands.
You may want to offer discounts for invoices paid within a certain time frame. One common offer is a 2 percent discount if an invoice is paid within 10 days.
Keep in Touch
Follow up immediately on unpaid invoices. Your customers will quickly size you up as to whether or not you are someone who expects to get paid . When prioritizing their payment schedule, your customers are more likely to put you at the head of the list if you have a reputation for following up on a regular basis. It is best to set a payment date on your follow-up letter and call your customer on that date if your payment has not yet been received. Having a written script for any follow-up phone calls you may need to make may make this process easier for you.
Remember that it is your business. If you let your customers dictate when you will be paid, you will always suffer a poorer cash flow than if you are clear about your payment policies. If you don't have written payment policies, write them now. Here is what you should include:
- Who will you offer credit to?
- How much credit will you offer?
- How will you determine your customers' creditworthiness?
- When will your bills go out?
- In what time frame will you expect payment?
- How will you follow-up if a payment is not made?