Cash flow. Two words capable of causing a twitch in many a business owner’s eye.
Poor cash flow management is not just a problem in the short term, but can also limit your business’ future plans and growth.
And left unattended, your business suffers, or even ceases trading.
It’s likely the biggest factor affecting your cash flow is slow or non-paying customers. But you’re not alone…
The biggest problem for most Australian small businesses today is late payments, and their impact on cash flow.
How to take control of your business cash flow
Don’t fall into the trap of weak cash flow because of slow payers. There is a lot you can do to prevent and limit their effect on your business.
Here are some simple ways you can improve your business’ cash flow:
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Set up terms and conditions
Before starting a new relationship with your customer, ensure you have a terms and conditions document for the contract and/or sale.
These terms and conditions outline the terms with which you conduct your business and provide protection for any claims against you.
This could be a web page you can direct them to and ask if they agree to the terms, or a more formal document they sign and return.
This is best written by a professional or legal advisor as it can be a complex issue.
The terms and conditions should include items regarding refunds, payment terms, limitations of liability, dispute resolution and definitions.
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Stop bad payers before you engage with them
Ask for business references. Although this has little value in ensuring you are paid, you will get a chance to discuss and gather information from other creditors.
Purchase a credit report. Veda holds data on more than 16.4 million credit-active individuals, 3.6 million on companies and businesses and 3.4 million on sole traders throughout Australia.
Creditor Watch provides similar credit reports, with the additional option of sending you alerts about your creditors which may affect their ability to pay.
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Clearly marked payment details
Ensure each invoice or communication with your customer states all the details they will need to pay you for your products or services.
Ensure that all your bank details are clear and include all the information they will need to make payment, such as international details like your ISBN or SPIN if you have global customers.
Each invoice should set expectations of when payment is expected and the consequences of late payment.
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Make it easy to pay
Open as many opportunities for your customers to pay. Offer direct deposit and an electronic bill payment service such as BPay or Australia Post Bill Pay.
Provide credit or debit card, direct debit and online payment service options with PayPal, Stripe, or eWay. Whichever is viable and suitable for your business.
Note that some of these methods do have charges applied to them, so choose the payment methods that will suit your customers best.
Many of these charges can be negotiated with the financial institution, so always ask. Passing on these charges to customers has become common practice with many businesses.
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Offer incentives for early payment
Offer discounts for early payment. My electricity supplier does this. The discount is significant enough for me to pay on time and save money.
Or the reverse, you can charge penalties or interest for late payment, however, there are regulations that need to be adhered to, so check these out before communicating them to your customers.
However, offering discounts for early payment does put your business in a more positive light.
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Take deposits or prepayments
If appropriate in your industry or with your customers, deposits or pre-payments can work well.
This practice is used more often in the services industry when the customer pays a deposit for future services or products.
Remember to account for the deposit received as a liability on the balance sheet until the goods or services have been rendered!
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Be strict with account terms
Use payment terms as a privilege when customers have paid on time and have a good history with you. When customers falter, use the payment terms as a negotiation tool.
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Follow up in a timely manner
By setting strict standards from the very beginning, your creditors see that you are serious about your payment terms.
As soon as the due date has arrived and you have double checked that they haven’t paid, chase them up.
To save yourself some work, there are some great add-ons to your cloud-based accounting software to automate this process for you.
Bonus tip: For really slow payers
If your business deals with large companies that are usually reliable but very slow payers, paying anywhere from 60-90, sometimes even 120 days, try invoice factoring companies.
An invoice factoring company finances your invoices from these clients and provides you with immediate working capital, while the finance company waits for your clients to pay.
The transaction concludes when your customer pays on their usual schedule. Note that due diligence applies here, as there are fees and charges associated with this type of service.
Some examples are Fifo Capital, Fundbox, or Kabbage or your bank may have this type of finance available as well.