Now that we have discussed the importance of cash flow. Now that you realize cash flow is oxygen for your company, how do you speed up that cycle to get paid faster?
There are a number of things you can do. Some require more work than others and some are dependent upon the strength of your relationship with your customers. One important thought to keep in mind is, the easier you make it for your customer to pay you, the quicker you are likely to get paid.
First and foremost, make sure your invoices are correct and complete.
Entrepreneur.com reports that 80% of all collection problems result from incorrect invoices.
Understand that the accountants working in the accounts payable department of a company don't just send out checks. They have to match up the payments with invoices. If your invoice is incorrect or incomplete, not only do you slow down the process for the accountants, they are likely to put your invoices on the back burner until they have time to figure it out.
Your invoices should contain all of the following:
Put terms on your quotes, contracts and invoices.
This is often neglected by small businesses. When you stress the terms, you are telling your customer your expectations for payment. This is standard business practice. If your customers are offended, they are probably not going to be good customers in the long run.
Sample Terms:
Payment due upon receipt - payment is due now and you expect immediate payment.
Net 15 - Payment is expected within 15 days of receipt.
Net 30 - Payment is expected within 30 days of receipt.
and so on.
Letting your customers when you expect to be paid is often overlooked, yet it is one of the surest ways to speed up payments.
Have terms include penalties for late payment or incentives for early payment.
A primary role for accountants in any business is to find ways to reduce expenses. Paying a penalty for late payment cost money. Receiving a discount for early payment saves money.
This can be very effective in providing incentives for your customers to make timely payments. There are two things you must consider when using these "carrot and stick" terms.
First, and the topic of a future article is the concept of "opportunity cost." If your customers have money invested at 12% and you offer them a discount of 1/2% for payment within 30 days, they are better off keeping their money in the bank. If however your offer them a 2% discount for payment within 10 days, that is much harder to pass up. They have to have a pretty hot investment to beat that.
Second, if you use the carrot or stick , you have a responsibility to enforce the rules. Regardless of how much you like your customers, regardless of their excuses for not making payment on time you MUST refuse discounts or apply penalties as you have outlined in your terms. If you don't then you are the chump and they will never take you seriously when it comes to payment. Sad but true.
Sample terms:
2% 10, Net 30 - You will give a 2% discount on the invoice if payment received within 10 days. Otherwise, the face amount is due in 30 days.
2% 10, Net 30, 5% 35 - You will give a 2% discount on the invoice if payment received within 10 days. But if payment is later than 35 days, there will be a 5% charge added for late payment.
Understand your customer's payment cycle.
A lot of companies send out payments on a fixed schedule. You can state all the terms yo want to, but as a course of doing business with them you need to understand their payment terms. Typically this will be 30 days, but it is not uncommon to see payment cycles of 45 or 60 days.
For example, knowing that your customer always cuts check on the 15th and 30th of the month or every Friday, gives you important information.
You always want your invoice to reach the proper person before the payment date. If they pay on the 15th and 30th and your invoice arrives in the 16th, you are not going to get paid until the 30th.
By invoicing late, you have slowed your cash flow significantly.
The next article will discuss some more creative methods for speeding up cash flow. Stay tuned.