Picture a scenario where all of your customers decided to delay payment of your invoices by 30 days. How long could your business survive without this cash inflow? How would you pay your staff, meet your overheads and pay your creditors?
If you don’t know the answer to these questions then careful cash flow management is essential to not only your business’ success but to its very existence.
Cash flow management involves carefully planning your business’ cash flow needs via the formulation of cash flow budgets and developing policies and controls around its cash inflows and cash outflows. Here we focus on how to manage a business’ cash inflows.
According to Dun & Bradstreet cash flow troubles account for approximately 80% – 90% of business failures, and more specifically latest research links a 25% increase in business failures with a similar increase in the number of days a business’ customers took to pay their invoices.
On average invoice payment time is 53 days and for many businesses this is almost twice as long as the standard 30 day payment terms that they want to be paid within. And with trading conditions becoming tougher for most SMEs this average is expected to continue to increase.
So how do you keep the cash flowing into your business bank account in this current trading climate? The key is to have both preventative measures in place to ensure customer pay you within your payment terms to begin with as well as effective and efficient measures to reel in those customers who do stretch the friendship.
Below are the solutions we provide to our clients to assist them with developing their invoice collection policies.
Preventative Measures:-
· Credit & reference check all new customers. This is a simple and cheap process to undertake because you don’t want to provide credit to a new customer who already has a history of slow or non payment
· Set specific credit limits for all customers. As an internal control this ensures you do not extend credit beyond what a customer has been ascertained as being able to pay
· Outline and agree upon payment terms up front and on a regular basis. Communication of these terms is the key to ensure customers can’t use the excuse, ‘sorry, I didn’t know they were your payment terms’
· Make sure these payment terms are clearly displayed on your invoices. This is another way to remind your customers of the agreed upon payment terms.
· Credit check existing customers. Much like the checking of new customers, this control ensures existing customers have not fallen into trading difficulties with other suppliers
· Offer as many payment types as practical to your customers. Cash, Cheque, Credit Card, PayPal, EFT or even Direct Debit……make it as easy as possible for customers to pay you so that they have less reason for delaying payment
· Send out the invoice as soon as possible. As soon as the service is provided or the goods are delivered ensure the invoice is issued. If you don’t issue the invoices promptly you can’t expect to be paid on time.
· Consider offering discounts for early payment. Business owners love discounts so if planned carefully, this can encourage faster payment of your invoices
· Depending on your business, ask for a deposit up front before proceeding and considering progress invoicing for longer type jobs or projects. This can assist your customers with their cash flow needs and reduces the chance of a large invoice remaining unpaid for a significant period of time.
· Ensure you have received written confirmation (i.e. a purchase order) for every order, especially if a customer requires their own purchase order number to be displayed on your invoice. This can reduce the risk of a customer delaying payment because of their own internal authorisation issues.
· Develop a strong working relationship with your customers and encourage them to contact you if they need extra time to pay before the due date. This is just good business sense and ensures you aren’t just an anonymous creditor.
· Ensure you have a complete and concise accounts receivable invoicing and tracking system in place and review your aged debtors regularly. If you can’t track when an invoice was issued and how long it is overdue, how can you expect to identify those invoices that need chasing up
· Consider the use of debtor factoring or debtor finance. In come instances, the use of debtor finance can free up much needed working capital to allow your business to operate and grow, however the downside with any finance is that it comes at a cost.
Collection Measures:-
· Follow up initial overdue payments promptly. As soon as an account is overdue, follow it up with either an email or phone call reminding your customer that they have exceeding their payment terms.
· Continue with regular follow ups for longer overdue accounts. For longer overdue accounts, keep up the pressure with regular phone calls as well as emailing monthly or fortnightly statements
· Make the customer commit to a payment date. Whenever direct contact is made with the customer, get them to commit to a payment date rather than a ‘sorry, cheque is in the mail’ response.
· Offer repayment schedules. When you know that a customer is having trading difficulties, offer to assist them by agreeing to a repayment plan to clear the debt. Whether you charge interest on the overdue amount is at your discretion and may be dependent on your initial agreement.
· Document all attempts to recover the debt. For legal reasons, make sure all the details of attempts to chase long overdue accounts are recorded as you may need these if the matter proceeds to mediation or court.
· Use the services of a debt collection agency. If the customer is no longer going to be using your business and they refuse to pay your invoice consider passing on the debt to a reputable debt collection service.
· Use the services of a solicitor. Much like a debt collection agency, the use of a solicitor is a last resort and should be used for larger debts owed by customers. The main reason for this is due to the costs involved in going down this path.
In summary when it comes to managing your customers and their payment of your invoices, prevention is always better than cure. So, the key is to do as much as you can initially to avoid having to waste time and money on chasing up bad debts.
James Solomons 