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Your Money
Improving Your Cash
Flow
Tips
to encourage customers to start paying on time
In my last column I introduced the strategy of budgeting
for profit by starting a profits account for your business
that should be funded monthly. As I noted, the key to making
sure that planning for profits pays off for a small business
often lies in the owner’s ability to become an expert
in cash flow management.
Cash flow is essentially the movement of money in and out
of your business. Cash inflow generally comes for the sale
of goods or services to your customers (or patients, if
you’re a doctor). Cash outflow is generally the result
of paying the operating expenses of a business, including
salaries.
Track
Your Cash Flow
The first step to becoming an expert in cash flow
management is to start tracking it regularly. By using cash
projections over time you should be able to determine the
amount of cash that will be available during a designated
time. To do this you need to produce monthly cash flow statements.
If you use bookkeeping software such as QuickBooks, an accounts
payable report that tallies your entries for bills will
show your cash outflow requirements. Likewise, projected
cash inflow can be seen from an accounts receivable report
that tallies your customer invoice entries for which you
await payment.
Your cash flow reports can also benefit your business in
other ways. For example, if you need a working capital loan
or a capital improvement loan your cash flow statements
can be used as supporting evidence to show the banker how
you intend to pay the loan back and to demonstrate that
you have the means to do so.
One typical cash flow problem I’ve seen show up in
the Accounts Receivable Aging Summary reports of small businesses
is the issue of late paying customers. Payment for your
goods and services is the key source of income for your
business. Anything that delays getting that money into your
company’s bank account is a drag on your cash flow.
If you have this problem at your business, you don’t
have to live with it.
Tips For Improving Your
Cash Inflow From Late Paying Customers
1. Make sure you send
your invoices on time, every time.
Sometimes it’s not the customers making cash flow
problems for a business, it’s the business itself.
You benefit when you have a vendor who is lazy in billing
you promptly. The longer he lets you keep your cash in your
bank account the more interest you earn. However, each time
you are late in invoicing your customers you’re the
one who is losing out because they pay you later than you
had planned or needed.
2. Take deposits or
retainers when orders are taken.
I find that quite a few small business owners are in a position
to take a down payment from clients but they do not because
doing so just hadn’t occurred to them. How much is
enough but not too much? Fifteen percent? Twenty-five percent?
Fifty percent? If you have not done this before you may
want to “test the waters” with various new customers
to learn what price points are acceptable for your business.
3. Have them pay by
credit card immediately.
While retail shopkeepers accept credit cards as a matter
of course, small businesses that don’t serve “store
traffic” tend to do without such a payment facility.
If you don’t run a retail business the cost of establishing
a credit card payment facility may be beneficial if it gives
you the potential to increase the speed by which clients
pay you.
Run a cost/benefit analysis with your financial planner.
Make an approximate determination of how much of your receivables
you would need to have clients pay by credit card to make
adding this payment facility worth your while. Then, contact
clients and tell them you’re taking an informal poll
to determine if they would be interested in paying by credit
card. Remind them that they could earn frequent flyer miles
or other credit card perks for their businesses or themselves.
4. Offer discounts to
customers who pay their bills quickly.
Everybody recognizes that store discounts encourage shoppers
to “buy now”. The offer of a discount may work
with some of your customers, too. If you have a customer
who has been negligent in paying you on time, consider offering
a discount of some sort if he pays you promptly and consistently.
Here’s one way to consider structuring your offer:
Say you have a customer whom you bill monthly. You could
tell her that for every three months that she pays on time
consecutively you will discount her next invoice by X%.
5. Make sure you know
who your late paying customers are and if they persist in
their lateness have them go on cash on delivery only.
For those late paying customers who didn’t accept
your previous offers (to provide you with a deposit first,
to pay by credit card or take you up on a bid to pay on
time and earn a discounted invoice three times a year),
you have one option left. Inform them that you will put
them on a cash-on-delivery billing basis.
If they do not accept any of these proposals, you need to
reassess whether you can afford to continue doing business
with them. If a client of mine had such an experience with
a customer of his, I’d question whether his customer’s
business was likely to remain viable for much longer and
warn my client to be careful when extending credit to this
customer.
Guy McPhail, CPA, CFP®,
is president of Zdenek Financial Planning, LLC.
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