“It’s All About Cash Flow”
This should appear on signs displayed in every small business. One of the key elements of running a successful company is managing its cash flow, since cash flow is what’s used to grow the business and pay employees, vendors and the owner. Without cash, every company will eventually go out of business. Therefore, systems need to be put in place to ensure the business’ cash keeps flowing.
Unfortunately, not all businesses are able to collect payment on delivery of their product or service. When this happens, the business is owed money, its cash flow becomes stagnant and an account receivable is established. At its most basic, a receivable is simply a short-term loan offered to a business’ client for the next 30 to 90 days. Accounts receivable are an inevitable part of business, but it’s vital that companies manage their receivables and do what they can to ensure they get paid as quickly as possible.
Billing and collecting accounts receivable in a timely manner is one of the key components to a healthy cash flow. In fact, for growing companies, accounts receivable usually increase, which puts more cash flow pressure on the company. As a result, the owner needs to have a process to monitor their receivables on at least a weekly basis. Here are some tips to help you manage your accounts receivable and speed up your cash flow.
1. You Are Not a Bank
Giving credit to clients is a privilege, not a right, so it needs to be monitored carefully. Many small business owners are too timid about collecting money from delinquent clients. It may be a difficult topic to talk about, but if the company did the work or delivered the product, there is nothing wrong with asking to be paid.
Don’t get uncomfortable, and remember that collecting payment is needed to pay your own company’s bills.
2. People Respect Payment Requests
Clients actually respect companies that recognize the need for cash and press hard for collections. Actively seeking due payment isn’t a sign of weakness or desperation: It’s a signal of a well-run company.
If possible, don’t give credit at all to clients, but if you’re in an industry where this isn’t an option, try to at least get a deposit upfront. If this still isn’t an option, set a short timeframe from the date the invoice is sent until its payment is due. For example, you could set your payment terms as “payable upon receipt” or offer net-10 days on it, each of which may prompt immediate payment.
3. Get to First
Getting the first payment from a client is always the toughest, especially if the client is a large corporation. It is critical that the small business figures out the approval path within the organization. This allows the business to match the new client’s invoice to its purchase order even before the invoice gets approved for payment.
At the start of the relationship, ask the client if there’s anything that needs to be done to be set up as a vendor in their system (i.e. requesting the customer’s IRS Form W-9 Tax ID). Be sure to also check to see if invoices can be paid electronically through direct deposit into the your company’s bank account. This provides a quicker boost in cash flow by cutting down on mail transit and expediting the bank transfer.
When the first bill is sent, call the company to check if the invoice was received, and ask when it’s scheduled to be paid. Right before that date, call again to see if the payment date is the same. Then, once the due date has passed and before it should have been received in the mail, ask if it was sent. Continue to follow up until the payment is made. All of this can be managed easily with electronic reminders.