You’ve worked hard to develop your product / service, you’ve done your research and priced your products appropriately and you have trained your staff in all the areas required (including superior customer service) to get your product / service to the market place so why haven’t your clients been paying their invoices?
Having just gone through (and still going through) a rather lean time in the economy it would be fair to say that some companies are stretching the time they take to pay their invoices out to suit them selves rather than their product / service provider, they start to become selective in who they pay and how much they pay and if your business is not on the “must pay now list” you could wait months or even longer.
How can you avoid this happening to you?
There are ways to encourage your customer to pay and still retain their business, yes that’s right, you are allowed to insist on them paying your bill without breaking down the relationship you have with them. Here are a few things to think about to improve your cash flow:
Terms of Trade
You are a small business, you’re not a bank and you cannot afford to wait until the 20th of the next month to have your invoice paid so don’t do it! If it suits your business to have your invoiced paid in 7 days then 7 days is what you give your customer, if 7 days is not feasible then why not make it the end of the month that your trading in, whatever works for your business, put it in your terms of trade, make sure your customers are aware of it and then stick to it. Never let your clients dictate to you what your terms of trade are, they don not know (or need to know) the reasoning behind your terms and conditions; you may think about bending the rules for “a really big job” DON’T it is the really big job that is likely to financially hurt you the most, and always remember that when you’re spending time on that big job that is not going to pay you when you want, you could have spent the same time working on a number of smaller jobs that will pay you on time!
If you are providing a service that will take a period of time to complete or can be very clearly broken down into specific stages then progress payments are definitely something to think about. Charging your customers a little at a time until the job is complete does two things, it ensures you have adequate cash flow and it ensures your customer is not going to get hit with a huge bill, they get to spread their costs, helping their cash flow. The thing to think about with progress payments is this, in your terms and conditions make sure you have it written in and your customer is aware that at specific stages of the service, payment will be required (and here is the important bit) and the next stage will not be started until payment for the previous stage has been received.
Restrict the Credit you give to your Customer
If you have a new client on board, you are perfectly entitled to restrict the level of credit you give your customer, again you can lay this out in your terms and conditions for example “once your account has been approved your credit limit will be $500.00 for the first 3 months ……” after the period of time you review the account status with the customer and agree on a more suitable limit if required. Maybe you don’t want to give the customer any credit limit to begin with, this to is perfectly acceptable, ask for payment in cash or credit card.
Use a Finance Company.
If you sell big ticket items another option is to use another company’s credit facility, give the risk to them. This is where you give your clients the option to pay off their purchase over a set time, lots of the bigger retailers, car yards and other large machinery companies use this option. The customer is happy because they get to spread their cost and you as the business owner will be happy because the finance company pay you in whole for your product thus completely removing the risk of mounting debt to your business.
What if the Customer still wont pay
ASK, there is a saying “the door that squeaks the loudest will get the oil” this is never truer when recovering money from your customers, there is a system I work to, it may not work for everyone but it should for most:
- Invoice is sent out, to be paid in 7 days.
- Day 8 arrives with no payment, a second invoice is sent again to be paid in the next 7 days.
- Still no payment: I phone up the customers account department and ask why my invoice has not been paid. At this stage I get a commitment from the person (who’s name I take a note of) as to when it will be paid; I ask for a date usually within a couple of days of the phone call. An email is sent confirming the conversation.
- I very rarely reach this stage: Still no payment I make one more phone call again followed by an email stating that if payment is not received the debt will be put in the hands of a debt collecting agency or taken to the small claims court.
- Never needed to be at this stage: Still no payment, the debt would be sent to a debt collection agency or I will go to the small claims court to recover the funds.
If you find yourself at point 5 the two options I have mentioned come with pros and cons; Small Claims Court cost you the supplier nothing other than time to present your grievance whilst putting the debt to a debt collection agency costs you little in time but will cost you financially (they take a percentage of the amount owed). It’s best to avoid this stage if at all possible because by the time you get here the relationship with the customer has usually completely broken down.
If your customers are aware of your payment terms before you do business and you stick to these terms you’ll find your cash flow should flow well.