In my research with small business owners and in my experience as the owner of multiple small businesses, dealing with cash flow is the biggest difficulty. Managing cash flow needs time and attention. Many small business owners work ‘in’ their businesses and not ‘on’ their businesses. Cash flow is definitely an ‘on your business’ issue. Just doing the work, issuing the invoice and ‘hoping’ the customer will pay within the terms (while the business goes onto fulfilling the next order) is not the smartest way to manage the money side of the enterprise. Having a reliable and predictable flow of cash into your business is the subject of this post.

In the last post we dealt with ‘Choose your clients wisely’, ‘Offer Credit Cards’ ‘Leverage”. In this post we’ll look at training your clients to pay on time, record keeping, dealing with government or those customers who you know will take 60 days or more to pay, and the importance of People in this whole process.

Training Your Clients to Pay On Time:

1. Have it be someone’s responsibility in your organization to keep checking that the customer’s signed delivery document made it from the receiver’s hands to the accounts payable clerk.
2. Be friends with the person cutting the check. Call a week before the payment is due so you know your check will be in the batch that gets released in the time frame of the terms. This is definitely a case of the squeaky wheel gets the oil. If you have a friendly personal relationship with the person who cuts the check, when there isn’t enough money to pay everybody, if the check preparer likes you and knows you stay on top of things, you’ll take precedence over another vendor. Sending cards and notes of acknowledgement and appreciation to the check preparer help her feel important and not just a clerk like other people may make her feel. This is where your employee who makes this contact in your customer’s company makes a big difference. If your employee establishes a warm appreciative relationship because he’s engaged in what he’s achieving, he’ll do his job ‘with heart’ meaning with sincerity and care.
3. By staying on top of the receivable as the due date approaches, you will know if there were any problems and will be able to rectify them before the payment is due. You’ll also have a better relationship with your customer because you will be known as a vendor that takes care of any problems right away. Great customer service and customer loyalty are not built on having problem free transactions. There are always minor things that can and do go wrong. Customer service and ultimately the relationship that is the basis of customer loyalty are built on how fast and easily the problems get fixed.
4. Some companies reward their customers by allowing them to take 1% or 2% off the bill if paid within 10 days. This is often phrased ‘2% net 10’. Whether you do or not depends on if you can give up that margin, if you want to set that precedent, if you think the customer will abuse it (take the 2% and still send the check in 30 days) and other factors that pertain to the situation. Getting payments in 10 days rather than 30 days can be very helpful especially if you’re borrowing money to fund the raw materials purchase, and giving 2% to the customer prevents you from having to give to your lender 2% or more.

Record Keeping

1. Having a small business is no excuse for not having accurate books that track your receivables. It’s important to have a listing of what invoices went out to which clients, when, their phone numbers and emails for easy follow up. What gets measured gets managed.
2. If I have a list of 10 invoices I want to follow up on and I have to look up each of the ten companies to figure out the contact name and phone number, it will become a big job. If it’s all readily available on a report that I bring to my screen in 10 seconds, I can make the 10 phone calls easily and with no excuses. It’s especially important when you’re paying someone else to do it. Why pay them an hourly wage to do unnecessary work that QuickBooks (or other accounting software) could do for you?
3. A metric on your dashboard (you have a dashboard, don’t you? 5-10 indicators you look at in your business every week) should be your ‘Average Days Outstanding.’ It’s a key performance indicator of how old your receivables are. If you offer net 30 terms, it would be best if your Average Days Outstanding never exceeded 30. Your accounting software will recalculate it for you every time you generate invoices and enter received payments.

Dealing with government or those customers who you know will take 60 days or more to pay

1. When you’re dealing with a large contractor, government or prime vendor, their policy is often to pay their vendors (you) in 60-90+ days. Sometimes they are very up front about it. Sometimes you have to ask. It’s important that you do. You’ll want to build into the project price the cost of the financing for your upfront costs. You may have materials, you’ll probably have labor. Part of your planning is to see how you will finance the purchase of what you need, a bank credit line, longer interest-bearing terms with your vendors, a purchase order financing arrangement? These costs should be figured into the price of the project. You need to plan how the cash flow will work and put these arrangements into place so a large order doesn’t kill your organization. Plan, plan, plan.
2. Follow up is especially important with multi-layer organizations. Did the delivery document reach the accounts payable clerk’s desk? Where did it get stopped along the way? Whose desk is it sitting on? Thank you notes are appropriate here. But don’t offer a gift. These people can’t take a gift.

The Importance of People

Cash flow is about money. But it’s also about people. People make the cash flow into your business and can make or break the timing that is so critical to small business. Treating people in your organization or in your customer’s or vendor’s organizations with trust, respect, appreciation and candor can make all the difference. People love to feel they are special. Human need for connection is paramount no matter what the situation. Customer loyalty is won at all levels, the CEO, the department head, and the accounts payable clerk. So as you are managing your cash flow, be aware of how you treat your staff. They will treat your clients/vendors the same way you treat them. If you set up a caring engaged empowering culture with your staff, they will communicate those qualities to the rest of the world. That will have a large effect on all the people in the process generating your company’s cash flow.

Please leave a comment or cash flow tip that will help other business owners.