Cash is king! It doesn’t matter how much you bill, if it doesn’t convert to cash quickly then you’re going to run into issues with growth very quickly, below we've got some great tips to get paid faster.
Time and time again we see business owners injecting more of their own cash into the business to assist growth, upon inspection we see that cash flow has become a constraint but a good deal of potential cash is locked up in aging receipts due from customers.
Good cash management reduces the likelihood or extent of bank lending facilities ultimately saving you on interest costs. Good cash management also enables you to make better deals with suppliers increasing the gross margin on what you are selling.
Poor cash flow really cripples a business, not only do you annoy your own suppliers with non-payment whilst you wait for your customers to pay it also becomes a major distraction to running a business as managing cash consumes greater and greater amounts of time the more critical it becomes.
If your business is growing steadily it may be worthwhile considering a formal credit approval and management process. The tips outlined below will assist you with developing one of these when the time comes, but in the interim and for many small businesses the following 5 key principals will assist to get paid faster.
A simple customer credit check can be useful with understanding past payment history of a customer. An example provider of these services in New Zealand is Centrix.
2.Terms of Trade
Establishing your terms of trade is important, it sets the boundaries and rules of your engagement with customers, not only that, it deals with a lot of issues should legal enforcement be necessary. Where possible have your terms of trade signed when you originally engage with your customer and ensure they are mentioned on all quotes, estimates, invoices, contracts etc.
If you are selling products then establishing your entitlement to register your claim to either recover the product or money using the Personal Property Securities Register “PPSR” is a must. The rules for how you engage when using the PPSR are vitally important but highly effective when done right.
We encourage that when establishing terms of trade you engage a suitably qualified lawyer. There are customisable online solutions though. Check out Autom.io it is a marketplace for the purchase of legal documents in New Zealand.
3.Know your cash cycle
Quite simply, get paid before you need to pay your suppliers. This motto becomes increasingly important the lower the margin on the product or service you sell. If you can establish your terms of trade and customer relationships with a payment cycle that results in you getting paid before you need to pay for your own direct costs or overheads then you’ve got a positive cash cycle, this will make growth so much easier to manage and handle.
Other opportunities that exist for assisting with the cash cycle include taking deposits, invoicing on a more regular basis, discounts for prompt payment or penalties for late payment.
4.Debt Collection Process
In recent times this process has been assisted with automation from cloud services. Xero has a simple reminder system but there are also offerings out there which move beyond just the email reminders and can also make calls on your behalf an example offering is debtor daddy. Regardless of your chosen approach it is important that you are ruthlessly consistent and systematic with your approach. Establish a reminder system and calling plan for chasing up debtors will ensure you remain front of mind of your customer when they are making their payments. It’s true the “squeaky wheel, gets the most oil”.
Quite simply an example Debt Collection Process could be:
5 days late – polite reminder 1
15 days late – polite reminder 2
30 days late – polite reminder 3
35 days late – polite phone call
60 days late – polite phone call with follow up email informing of next steps if payment not forthcoming in 5 days
65 days late – Collection agency
5.Make it easy to pay
In this day and age 99% of payments happen by some form of electronic transfer. Depending on what industry you operate in it may be helpful to have credit card facilities for making payment. If you are using accounting software, like Xero, then adding these types of services to your invoices is really easy.
For businesses where you are out and about plying your trade, consider using mobile eftpos facilities. From personal experience there have been many times where had the option been to pay for services there and then I would, except what happens is an invoice is sent through by email and payable half a month later.
Getting paid faster requires establishing some rules and procedures up front but once in place the monitoring of collecting cash becomes a lot easier, and hopefully faster.
If this all seems too hard or complicated, don’t worry, that’s why we are here, get in touch and we can discuss getting a sold debt collection process in place tailored specifically for your business.