When entrepreneurs need cash fast, they typically think of two things: getting or increasing their bank loans, or making a contribution to equity with their personal savings. Before you do one of those two things, here are five ideas to consider that will help you permanently raise cash with very little cost.
1. Change Your Invoice Timing
You might be surprised at how many excuses I have heard about why invoices cannot go out the door on a timely basis. Comments like “I hate going through the time sheets,” “I am allergic to paperwork” and “the dog ate my invoices” will not get your cash flowing any faster!
A key reason why cash flow problems occur is that expenses are incurred before a customer covers them with a sale. When possible, match the timing of expense payments with invoice collection. Time your invoices so that they go out to the client as quickly as possible after the sale is made.
Here are some examples:
- A landscaping company solved their chronic payroll cash shortage by invoicing customers every two weeks instead of monthly.
- An attorney bucked his industry standard and billed clients on time instead of two months behind.
- A retailer offered early-season sales to ease cash flow until the holiday rush.
- A physician offered service discounts to patients who wanted to bypass their insurance.
2. Change Your Invoice Terms
Once you’ve gotten your invoice out the door as soon as possible, make sure they get paid as fast as possible. You may have seen phrases such as “Net 30.” This is a payment term that means the invoice should be paid within 30 days of the invoice date.
Another term is “2% 10, Net 30.” This means that if you pay in 10 days, you can take a 2% discount off the invoice total when you pay, or you can pay in full in 30 days.
You should set your payment terms so that your invoice gets paid quickly. A too-common payment term is “Due upon receipt.” This might sound like the fastest term to use, but human nature doesn’t allow that to happen. Instead, the fastest term to use is in the range of Net 10 to Net 21.
If you can get away with it in your industry, ask for a down payment, or encourage clients to pay upfront. For example, a consultant decided to ask for a 50% down payment on jobs and no longer has any cash flow or collection issues. As an additional benefit, when a client pays ahead of time, they will become more committed to the project.
3. Make It Easy to Pay You
The less check-writing time it takes your customers to pay you, the faster you’ll get your cash. It’s just a side effect of how busy everyone is these days.
Take a quick glance at your invoice right now. Is it clear whom the check should be made out to? Is it clear where to send the payment? Is the amount due in a larger-sized font than everything else? Do you say “Thank you” on the invoice? Try using an invoice maker to ensure your invoices contain the right information and represent your business well.
When you send out the invoice, include step-by-step instructions right on the invoice that tell the client how he or she should pay you. If you accept PayPal, include the link to the button. If you take checks, consider including a self-addressed envelope.
Also, consider offering an online payment option, which can boost payment speed to the next level. Offering a way to pay your invoices online speeds up your payment by 17 days, according to Laura Epperson of Funding Gates.
4. Keep in Communication With Your Customers
If the invoice amount is exactly what the customer expects, then chances are they will pay the bill without a second thought. If the bill comes as a shock, then you can probably count on the client procrastinating because it’s one more thing they have to deal with.
You can prevent surprises with these tips:
- Create a contract between you and the client that clearly identifies the price, payment terms and schedule, as well as what happens if the project changes.
- Keep your client informed of the status of the project you are working on.
- Keep your client informed of any changes in billing they might not expect.
Great communication—even just a few sentences here and there—can make all the difference when working with clients.
5. Have a Plan for Late Payers
Stay on top of customers who owe you money. You’re not a bank, so don’t let them use you like one. If the invoice is not paid within 30 days, it won’t hurt to send a gentle, polite reminder to your customer that their bill is due soon.
The later the payment, the more aggressive you should become. Have a plan in place that dictates when you will contact late payers and when to follow up. Get a commitment from the client about when they can pay you, and don’t be afraid to get professional help before the invoice gets too old. The chances of collecting an invoice dwindle as it gets older, so prompt action is best.
DSO stands for “Days Sales Outstanding,” and it represents the average amount of days it takes for customers to pay your bills. Calculate it as follows:
Accounts Receivable / Net Credit Sales x 365
Once you implement these tips, your DSO should go down, and your cash balance should go up. When your cash goes up, you can either pay off the loan a bit and save on interest, or you can simply breathe easier knowing that you’re not cutting it so close on payroll every week.