Cash flow is a balancing act.
One of the biggest reasons why companies run into trouble is that they do not collect upon their receivables quickly enough.
The challenge is understandable: the process of pursuing customer payments is a job upon itself. Typically, small businesses have small teams, with founders overseeing finance. It’s easy for operations to slip through the cracks. Not to mention, your customers have their own finances to handle.
What happens if your customer doesn’t get paid? If they don’t get paid, you might not get paid. That’s one of the reasons that small business ownership is risky: even with healy revenue projections and profitability, cash flow jams can be crippling.
Avoid this pitfall by collecting on payments, quickly.
Implement Clear Payment Policies
Small business owners need to be proactive in getting paid. While accounting is time-consuming, it is absolutely critical to get right. If you don’t have financial resources to meet your basic expenses, you don’t have a business.
One way to ensure the financial health of your company is to maximize the speed at which you get paid. For one, you could set up defined payment terms that give your customers a deadline to send funds to your business. If your customer lapses, it is within your right to cease providing service.
More importantly, you can take proactive steps to prevent a delay in payment. Let’s say that you give your customers a 30-day time period to pay you. You could customize your accounting software to send automated reminders every week, until your customer is ready to pay you. For tips on maximizing your cash flow by choosing and defining invoice payment terms, check out this resource, here.
Customer Payment Options
Another way to speed up the pace at which you’re paid? Make it easy for your customers to pay you, by accepting payments in a variety of methods. Rather than getting stuck in an administrative funk, your customers can select whatever is most convenient for them. If you are willing to accept payment in multiple convenient methods, you’ll open up your business to more buyers — and most likely increase sales. Here’s an overview of some options to consider:
For years, research from the United States Federal Reserve has found that buyers use cash more than any other option for its simplicity. Here are some benefits to accepting cash payments:
- No credit card or debit fees
- The money is available immediately
- You won’t have to deal with fraud, bounced checks, or unauthorized card usage
But cash also has its disadvantages.
For one, it’s challenging for business owners to maintain a paper trail or accounting log. If your business takes in a lot of cash payments, it’s a good idea to make frequent bank deposits to avoid theft issues.
It will also be important to maintain a clear paper trail, to avoid a potential audit scenario or problem with the IRS.
Checks are a straightforward way for businesses to accept payments — and may be the most straightforward path forward for your customers to pay you.
Checks create a clear paper trail from the point that your customer issues one to the point where you make a deposit.
The challenge with checks as a payment model is that paper gets lost easily: envelopes can disappear in the mail, and on rare occasions, banks may lose records of funds.
Getting a check reissued can be time-consuming and cause unnecessary delays in your payment process. Avoid potential cash flow hiccups by taking the following steps:
- Plan around timing, in advance. Know when banks are closed for days off and holidays, and make sure that you have a baseline understanding of the time it takes for funds to clear into your account.
This vigilance will guide your cash planning strategy, which you can use to determine due dates for checks.
- Keep a photographic record of the checks that you receive. If a check bounces or if you are ever subject to an audit, you can easily pull the documentation that you need to answer questions.
- Have a policy in place around bounced checks, so your customers are diligent about paying your company on time— and ensuring that funds are available to do so.
Having this policy in place, up front, will help you manage hiccups should they arise. If you’re looking for a resource to guide you through the process of navigating late payments, this article can help.
Take the following administrative steps to avoid administrative problems that come with accepting checks as a form of payment:
- Don’t take temporary, non-personalized, or unnumbered checks.
- Don’t allow customers to write a check that includes cash back.
- Don’t accept out-of-state checks.
- Don’t accept postdated checks.
- When accepting a check, look to see that the buyer’s name, address, and phone number is on the check, that this data matches the picture ID, and that the signature matches the one on the ID.
- Consider an electronic check verification system like TeleCheck to decrease your risk of bounced checks.
- Have a collections policy in place to address bounced checks.
These parameters will help you stay legal, maintain compliance, and avoid fraud.
Credit and Debit Cards
Many consumers get cash back and points when using a card, so it’s not uncommon to see someone paying for even the tiniest of purchases with one.
Credit cards have the potential to be a major growth lever for your business, making it easier for customers around the world to do business with you.
In addition to opening doors to more customers, credit cards have the potential to make purchase experiences better. The flexibility of a credit card makes it easier for customers to buy more products or sign up for a subscription package.
Keep in mind, however, that credit card usage is often tied to “impulse buying”—make sure that you price your products fairly and that you are not creating unnecessary pressure for your customers to buy more products. Some other considerations to keep in mind:
- You’ll pay a small processing fee for sales that involve a credit or debit card. To determine the fees your business would pay, use this free merchant account fee calculator.
Typically, fees hover around 3-3.5% of the total bill and include a per-transaction processing fees. If you choose to accept credit cards, you may need to raise your fees to preserve your margins.
- You may be exposed to credit card fraud. To reduce your risk, always ask for an ID and then compare it to the name and signature on the credit card.
Also double check the security features by making sure the card is signed, that the hologram changes color when held up to the light, and that the account numbers on the front and back of the card are the same.
Keep in mind that the laws that govern credit card fraud are often complex, varying by the state and countries in which you do business.
You’ll need to follow regulations at national, state, and local levels. Working with a lawyer can help you identify and manage your risk.
By using a credit card processing service such as Stripe, PayPal, WePay, or QuickBooks online, you can avoid the potential for liability, altogether. Beyond ease of use, these platforms offer compliance and protection.
If you’re looking for in-depth guide to the pros and cons of accepting credit cards for your small business, check out this resource.
Online and Mobile Payments
The biggest benefit to setting up online and mobile payments is that you can eliminate paper checks from your accounting workflows altogether.
Digital channels automate the process of creating documentation and paper trails—time sinks that stop your business from performing at its full capacity and pursuing new opportunities for growth.
Switching to online and mobile payments will be a valuable strategic move for your business. If you use accounting software like QuickBooks Online, you can manage your books from your computer or phone, from anywhere.
You don’t need to keep a detailed paper trail, because your software can automate everything. You can use your phone to process payments when you’re on-site, with your customer.
A new trend is for business owners to use third party software and merchant services providers for software that would be out of reach to develop, otherwise. Here is what you should know before you make your decision.
- The cost of setup will be lower with a third party provider, but the transaction fees are typically higher.
Some providers offer a sliding scale with lower transaction fees as your sales increase. If you are just starting out, a third party will allow you to test the waters while avoiding a large setup expense.
- You don’t have to have great credit to quality for a third-party provider, but you typically do to get a merchant account.
- Chargebacks are common with third-party providers when dealing with online customers because consumers will see the name of the credit card processor rather than your company name. It’s a good idea to make sure the customer understands that during the checkout phase.
Here’s what you need to know to get started with mobile payments:
- All you need to accept credit cards is a smartphone or tablet, a card reader, and a mobile payment app from your provider.
- You’ll pay fees and transaction fees just as you would with a traditional merchant account.
- You won’t have to wait weeks for payment. Most mobile merchant providers pay within days.
Studies in the financial services and software industry consistently find that multiple payment options improve business health. Customers appreciate flexibility, and businesses need to get paid without hiccups or delays.
Understanding your options for processing customer payments is important for maximizing your cash flow.