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Money / Financial management

Are you getting in the way of clients paying you?

We all know about the costs of not being paid on time; it's one of the biggest hurdles for small businesses to overcome. But might you be the one getting in the way of your clients being able to pay as quickly as possible?

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Today I’m going to discuss the costs of poor debtor management and also provide useful tips to maximise your customers’ ability to pay you on time.

The way you quote, communicate, work with and follow up with your clients all have a direct impact on your bank account balance. Remember it is your money; just go about the processes in the right way and your money will be yours sooner!

In recent times the amount of articles and blogs in business circles written about how to get paid on time, if printed, would probably be enough to cover the entire country in paper. Most likely because this is still one of the biggest hurdles for small businesses to overcome and the impact on a small businesses cash flow from late payments can be catastrophic.

"Cash flow is the lifeblood of all small business, without a steady stream of cash flowing into your bank account, you are hampering your businesses ability to not just grow, but survive."

The costs of poor debtor management and cash flow can be measured in the following ways:

  • Straight up bank interest on overdrafts, credit cards and lines of credit that need to be used in place of real paid cash.
  • The cost of supplier penalties for late payment due to a lack of cash. Especially the ATO which currently charges 9.36% on unpaid debts.
  • The missed opportunity of not being able to take advantage of supplier discounts for early payments.
  • The pure cost of having a staff member or accountant chasing debtors (spending time on the phone and so forth).
  • The missed opportunity to earn bank interest or other investment income on surplus cash flow.

Even the smallest of businesses the costs I’ve mentioned have the ability to represent a significant and tangible amount of money. This, of course, has the potential to create an out-of-control spiral as the above factors then affect the next period cash flow and so on until businesses are unable to pay their debts and eventually close.

It does not need to be this way.

I don’t intend on repeating the many articles on practical cash management tips (I wrote a similar article myself on the topic just over twelve months ago). The focus here is to emphasise the absolute need for a business to make sure every client or customer is fully aware of exactly what they are getting for their money. In doing so, you prevent angst and frustration on the other side of the fence. This frustration with receiving unexpected bills and deadlines for payments can and does lead to longer payment times.

Remember, you may be invoicing business to business, but there are real people at the other end of the process and their emotions can and will affect how quickly you get paid.

Try these five pointers to maximise the ability of your customers to be willing to pay you on time:

  1. Should a client engage you to provide a quote do so promptly and always specify an expiry date on the quote so you aren’t left short by supplier/material price rises. The initial quote should demonstrate a timeline of expected progress payments or at least an anticipated deadline for the work involved with a short payment term at the end of the project.
  2. Where large quantities of materials are needed to satisfy a client’s work, ALWAYS get an upfront deposit. If you need to purchase $10,000.00 worth of materials (on a 30 day account) and a job takes two months to finish and then another 30 days (if you’re lucky!) to be paid for, your business is effectively cash negative to the amount of $10,000.00 for a full two months. Refer to my original points above on what this is going to cost you!
  3. Documented payment terms must be attached to the engagement document, whether that be a quote, an upfront invoice or any other form of agreement to provide services. If you don’t have documented legal payment terms, speak to your solicitor. It’s a short term cost that can save you thousands in the long run.
  4. Be aware of what accountants refer to as “scope creep”. This is where you quote for an agreed service at a fixed price. Subsequent to this the client expects more and more of you and of course you comply with their requests to keep them happy and to keep the job progressing towards its completion. Any and all additional work needs to be invoiced as per the terms of your agreement, see why you need one?
  5. The previous point reinforces the need for a detailed quote or engagement letter so both parties know what is and isn’t covered. By protecting yourself you also inform the client. An informed client cannot then get upset with an additional invoice for extra work, especially when they initiated the work. Always do as best you can to issue a new quote for any extra works that can be treated as a signed legal document in the vent of a dispute.

Cash flow is the lifeblood of all small business; without a steady stream of cash flowing into your bank account, you are hampering your business’s ability not just to grow, but also to survive.

The way you quote, communicate, work with and follow up with your clients all have a direct impact on your bank account balance.

Remember it is your money, just go about the processes in the right way and your money will be yours sooner.

John Corias

is a senior partner at m.a.s accountants and is passionate about growing, building and developing small businesses.

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