Having previously covered the foundations of good cash flow management, today I’m going to look at proactive debtor management strategies. In other words: ways you can improve the flow of money coming into your business from the sales you make.
Too often business owners make the mistake of equating sales with cash in the bank. Whilst making a sale is important, it means nothing if the cash isn’t actually collected from your customer. Failing to do so could see a promising business fail very quickly.
Below are some debt management strategies you can employ immediately to get paid quickly and therefore keep your cash flow healthy. Regardless of any strategy you adopt, communication with your customers is paramount. Be clear, concise and timely in letting your customers know your payment policies and how you do business.
1. Don’t give credit
This might seem obvious but many businesses assume that they have to offer credit in order to gain a sale. In some industries it may be unavoidable as it is considered the norm. (For instance if you are wholesaling a product to Woolworths or Coles then you will need to be prepared for lengthy payment terms.) For most small businesses however, your default payment terms should be cash on delivery. You should only give credit if asked and then only after reviewing the risk of doing so on a customer by customer basis. Remember, every day you don’t get paid is a day you are effectively funding someone else’s business.
2. Have solid terms and conditions of trade
Your business should adopt well drafted terms and conditions that apply to every customer and every sale. Not only will these terms and conditions give you the basis for taking action against someone who doesn’t pay, it also sets the expectations for both you and your customer.
Your terms and conditions will need to address a number of areas. Have a look at the terms and conditions of other businesses to get a feel for their contents but I highly recommend you employ the services of a good lawyer to draft some that are specific to your business and based on current legislation such as the Personal Properties Securities Act.
3. Remind your customers about payments
Like you, your customers are busy running their own businesses and payments to suppliers do get overlooked. Friendly reminders about upcoming invoice due dates as well as amounts past due will ensure they are aware of the payments they need to make and have every opportunity to pay it, or communicate to you if they need some extra time. Regular reminders also limit the excuse of ‘I didn’t know’.
If you’re looking for an easy way to automate reminders, my team uses a great application called ‘Debtor Daddy’. It works seamlessly with Xero and has markedly sped up our debtor collections process.
4. Take a deposit and/or progress payments
Wherever possible, aim to take at least some amount as a deposit before providing goods or commencing a job. This ensures you have been paid something prior to investing your time and resources and you will find most customers will respect this position.
If you are working on a larger project for a client you should also invoice progress payments in line with stages of the job’s completion. You may also want to request full payment prior to the completion and handover of any final materials.
5. Make it easy for your customers to pay
You’ll be stunned how big an impact this simple thing can have on getting paid quickly. There are many technologies and services you can quickly and easily implement that make the payment process seamless. For example, Xero allows you to connect payment services to your invoices so your customers can pay with the click of a button.
6. Have an authorised direct debit form on file
As part of your terms and conditions of trade you may wish to have the customers you deal with on a regular basis sign a direct debit authority. This allows you to receive payment on an agreed date.
7. Offer a discount for early/on time payment
By incentivising your customers to pay on time you can create a great ‘win/win’ situation. You get paid in a timely fashion and your customer gets a discount.
Be sure to do some pricing calculations to determine what discount is appropriate. Firstly, think about what would be attractive to your customer then look at how it will affect your margins. In our experience we have seen discounts of between 3% and 10%.
There is also nothing wrong with increasing your price to factor in the discount. It’s about making your customer think about prioritising you over other bills they have to pay.
Once you have worked out your discount make sure you communicate it to your suppliers.
By employing some or all of these strategies you can enjoy a constant flow of cash into your business without the stress that comes with chasing people for payment.
Do you have favourite debt management strategies or techniques for getting paid as quickly as possible?