Getting good at cash collection can be the biggest enabler to business growth for many businesses. Try this exercise to see what I mean.
- Think about the 3 top barriers to business growth for your business right now.
- Write them down.
- Get the number for how much cash is owed to your business but is late.
- Add the number in the step above to your current bank balance.
- How many of your top 3 barriers could you remove with that new bank balance in place?
If you’re like most businesses I meet for the first time, you will have a fairly clear understanding of what you want to do to grow your business (new employee(s)? marketing budget? new plant or equipment? …) and often it’s the unpredictability of current cash flow that puts business owners off making those decisions.
On the darker side, many profitable businesses have gone out of business because they ran out of cash as they grew.
Managing cash (and a large part of that is about getting paid on time) is vital to stay in business and to grow and prosper.
So how do you go about getting paid on time? Here’s 3 ideas that may help you.
1. Categorise your customers
Customers generally fall into one of the following categories :
- Always pay on time
- Pay late after one reminder
- Pay late after multiple reminders
- Don’t pay or won’t pay until forced to
By the way, category 2 customers are often just disorganised. Try helping them with automatic payment options such as Direct Debit or standing order payments.
2. Set up a process to deal with each category.
A balance between reminding before payment is due and following up quickly if a payment is missed is required here.
Your process should cover what happens at the point of sending out your invoice, what happens in the time between invoice out and payment due and what happens immediately after payment due date.
Your process should be polite, fair and non-emotional and should be administered as part of a basic credit control or admin function. Remember, you’re trying to make this easier for both businesses and strengthen your relationships rather than break them.
3. Consider your payment terms.
Firstly be absolutely clear in your terms and conditions what the payment terms are. Your terms and conditions are a vital part of any cash management activity.
If you have habitual category 3 or category 4 payers, it’s worth considering the terms you offer them. Credit terms are a privilege that you as the supplying business grants – they are not a buyer’s right. Just ask any start-up business that didn’t get credit on day 1.
- Payment in Advance
- Part Payment in Advance
- Reducing credit terms to habitual late payers
- Late payment fees (to the extent allowed by law)
- Offering an early payment incentive to category 2 and (possibly) 3 customers.
- What is the effort and risk involved in chasing habitual late payers – is it worth it? If not, change the rules of the game.
A few more points to consider :
- Often, larger businesses have a very specific and defined process for managing invoices and payments. If you make sure your administration conforms to their processes, payment can be highly reliable.
- There comes a point where a collections agency may be useful.
- A lot of the delay in getting paid is self imposed – follow up promptly and courteously.
- It is unfortunately common to have a large overdue payments list – this does not have to be the case for your business.
All too often, businesses accept late payment as “it’s just like that in our industry”. Well, it doesn’t have to be. With some well directed, sustained activity your outstanding debtors list can shrink and all of a sudden you’re out of the “can I pay the wages next week?” nightmare and into the “how do we find our next great employee?” excitement.
If you’d like to discuss any of the themes in this article, please feel free to book a 15 minute call using the booking links on this site or email me at firstname.lastname@example.org and we’ll find a time to speak.