Thoughts on Cash Flow – Collecting Your Accounts Receivables (part 1)
Cash Flow -The thorn in the side of the small business owner. Let’s see – there is the ever present payroll that comes up regularly, the rent, all the other expenses. To offset all the money going out, let’s hope there is money coming in. And let’s suppose we want to take it up a notch and do a marketing campaign or hire another employee. Then we have that expense even before we land new clients and their payments to pay for it.
Let’s hope that clients pay in a reasonable time frame. But ‘hope’ is a really weak word. Certainly not strong enough to build a business on. How can we better our odds that our receivables will be paid and in the bank account in time for us to pay our expenses? After all, cash flow is all about timing. Getting the timing predictable is important especially for small business, and especially for bootstrapped small businesses.
Choose your clients wisely:
- Paying within terms (due on receipt, net 10, net 30, etc.) is about honoring promises. I promise to provide you with this product or service and you promise to pay me in the time frame we agreed upon. This is a value. Does you client share this value with you? Did you talk to your clients about values when they were still prospects? I know this doesn’t often come up. But maybe it should. If our clients knew our organization’s principles of doing business, they would be more likely to measure up to the level of integrity you expect. Are you telling your salespeople that you want to attract clients who also keep promises and run their businesses with principles?
- Did you ask them to fill out a credit application? The credit application asks them to identify who their bank is and several other creditors. Call the creditors. If it’s a large credit line, perhaps you want to run a D&B report on the company. Before you become this organization’s ‘bank’ and you give them a ‘loan’ for the amount of the purchase, shouldn’t you act like other banks and check their ability to repay and their history of on-time payments?
- Many companies make the first sale a COD sale. They want to test that the client has sufficient cash flow to pay on delivery at least once before credit is issued.
- Have the courage to say ‘no.’ When a company asks for credit with the offer to become a regular customer, sure it would be good to have these sales. It’s tempting to say ‘yes’ to build up revenues, especially since we’ve had a depressed economy. But nothing will sink you faster than you investing a lot of your cash into providing a product or service to a customer who then won’t/can’t pay you for it. You’re on the hook to your vendors and your credibility and credit are on the line.
Offer Credit Cards:
- Sure you lose a couple of points to the credit card company but you get paid right away. It helps your cash flow immeasurably.
- If you have recurring billing, the same billed amount every month, you can set it up as an automatic payment and reduce your paperwork and admin time.
So many business owners issue an invoice and then forget about it. They feel it’s the buyer’s responsibility to pay, and the business owner is off to handle the next sale. The aware business owner knows that the sale isn’t over til the check clears the bank because the money is in constant flow. Managing the timing is the essence of keeping it flowing. Collect from your customers early, pay your vendors late. More businesses have remained successful because they collected from the clients (pay on delivery) before they had to pay their vendors (30-60 days). They then utilize the cash during the interim period to generate interest on an investment, invest in a business tool with an immediate payback, pay down a line of credit to keep their bankers happy and reduce interest, etc. Business is all about leverage, other people’s time (your employees), other people’s money (cash flow, bank loans, investor’s contributions), and your organization’s ideas to create value. Pay attention to cash flow and you’ll sleep well at night.
In the next post we’ll address:
- training your clients to pay on time,
- record keeping
- dealing with government or those customers who you know take 60 days or more to pay.
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