Insights on Money Management
6 Instant Ways To Improve Your Cash Flow
Spoiler alert - proactive client payment policies are the secret sauce to improving your cash flow
As we wrote about in a previous article, Cash is King in any business. How you keep it flowing into your business with regularity and certainty matters greatly. And let's face it, most (if not all) small business owners have had a sleepless night (or more) worrying about whether they will be able to make payroll or whether a particular client will ever pay their invoice.
Before we dive into our 6 ways you can improve your cash flow we’d first like to reframe the idea of ‘extended payment terms’. By that we mean anytime you’re not being paid 100% up front for each product you sell or service you deliver. If you’re not paid 100% up front (and most are not) then you’re offering credit to your clients, or you’re ‘loaning’ them money if that makes the point clearer.
Now we’re not saying that you shouldn’t offer extended payment terms to your clients but we are saying that you need to be deliberate and considered in doing so. And as the spoiler alert already told you, operating your business with proactive client payment policies in place is critical.
To reduce your risk of operating with overdue accounts or to handle a client who is a serial ‘reluctant payer’, here are 6 ways you can improve the cash flow for the sale of your products and services in your business immediately.
1. Do not offer extended payment terms automatically for new clients
You’ve probably been a new client with a large company. What are 2 things they did with you from the outset? Setting up the terms of your account and performing a credit check.
Some business owners we work with cite a reluctance to require strict payment terms based on their fear of offending the new client. There could be a small risk of a new prospect not liking the new payment terms but, you can simply explain that this is standard for new accounts and gets reviewed after [insert time or transaction number here]. In our experience nobody is offended by this.
And, if a new prospect is pushing back hard against strict payment terms, you have to ask yourselves why… Maybe they’re coming to you as a new prospect because they’ve failed to pay their previous supplier who has put their account on ‘stop’. Or, maybe they know they don’t have the cash flow of their own to support your terms. Either way, this is a red flag!
And as for credit checks, it’s so easy to do online these days. Anyone can go to one of the reporting agencies and look up your business's score. They’re not always free but, think of it as a smart investment in your cash flow forecasting. Three of the major ones are Dun & Bradstreet, Equifax Business and Experian Business - we suggest you take a look at these once you’ve finished reading this article.
2. Collect part payments
And you’re not limited by the number of ‘part payments’ you can charge. Naturally, it should be ‘sensible’ so as not to irritate the client or create extra admin at your end but, using the building example again you can charge multiple part payment using milestones as your lever.
For example: For a builder it could be a deposit with the order, a milestone payment for getting the foundations completed, a milestone payment for achieving ‘lock up’, another for completing works and another against a defects liability period.Or if you provide services, you might charge an initial percentage of the projected bill or a fixed amount as a retainer before you start to work on the project.
Think of part payments of improving your cash flow and reducing your risk from the outset. If you don’t already, just imagine the impact this could have on your business!
3. Get your invoices sent promptly
In this wonderful era of technology it's never been easier to send invoices (and track their corresponding payment). But still there are businesses out in the world who take weeks or months to raise an invoice after the product is delivered or the service provided.
What message does this send to your client?
Firstly, it doesn’t help your client to manage their cash flow and secondly, does it demonstrate that your business is a well oiled, professional machine? Hardly.
And it’s not also not uncommon to see late payments for invoices that have been issued late. Why? Well, you set the precedent of making it clear that you’re not in a hurry to be paid…
Our advice is to issue each and every invoice as soon as you are able to i.e. don;t wait until the end of the month to stockpile your invoicing. Doing so means you could be extending credit for up to another whole month!
4. Don’t hide your terms and conditions
It’s your responsibility to make sure your client knows exactly what the payment terms are for each invoice. Therefore, don’t hide this important information where it's easy to miss. And use clear, concise language such as ‘Payable within 30 days’ or ‘Due Date is XYZ’.
For new clients you should even follow up the invoice with a call to make sure they’ve received it. During the call you can offer to answer any questions they have about it and explain the payment terms owing to their being a new client. It's not sneaky, it's smart.
5. Reward your clients who pay on time
There are few on this planet who don’t respond well to an incentive of a lower price. Knowing that, why not reward your clients who like to pay on time with an extra incentive to pay early?
For example, if your usual terms are 30 days, you could offer a small discount for payment received in 14 days. And make sure you thank them for paying early! In a world that still hinges around relationships, saying thank you can go a long way.
6. Install follow-up procedures for clients who miss payments
In a world of increasing automation, late payments should be red flagged immediately and a follow-up procedure followed religiously. History has shown that the faster you follow up with a missed payment, the more likely you are to get paid.
Whilst there are many channels you can use to communicate with your clients these days, a phone call is still one of the most effective as emails or messages can be missed or ignored. It can be a simple ‘touch base’ type call in the first instance as it could just be a genuine oversight that gets fixed immediately.
If a call doesn’t resolve the issue then it's time to turn to some form of written communication. This should take the form of an escalating chain that starts with a pleasant, ‘We note that your account is overdue’ right the way to a collection letter.
Make sure that at some point in your follow-up procedure there is a point where you put their account on ‘stop’. And make sure you tell all stakeholders otherwise the sales team may continue to quote new work without any awareness that payment is overdue from what they last sold to that client.
On some occasions it may be necessary to hand an overdue account to a collection agency. But if you install and live by a proactive client payment policy, using the above as a guide then the chances of needing a collection agency are dramatically reduced.
If you would like further advice about installing or improving a proactive client payment policy our team would be happy to help. As professional business advisors we strive to ensure that our clients have a steady, reliable steam of cash to help protect and grow their businesses.
If you have any questions on how to implement better cash flow strategies. Contact us for professional business and accounting advise.