Cash inflow can be a crucial issue for small businesses: until customers pay invoices issued by the company, it may not be able to turn around and pay its own bills. That can make improving its cash flow a priority. Since the inception of the financial crisis in September 2008, the number one question on most people’s minds has been “how do I keep my company cash safe?” A company might have very well managing its cash outflow (payable and debt), how about the cash inflow? What are effective ways to go about speeding up the turnaround for its customers?
Business owners, chief financial officers, vice-presidents of finance and corporate treasury teams have had to address the same issue. But for companies, the issue is more complex. After all, most customers tend to pay late now days or a net-30 basis at the fastest. No number of phone calls or nagging will change the basis. Let say you have a very good payment plan—incoming and outgoing, does the plan run smoothly? I doubt it.
I would say that a few tweaks to your invoices can often make a difference in how soon they get paid. You may want to follow these ways:
1. Discuss Invoices In Advance
The more that your customers know exactly what to expect when they receive your invoice, the faster you’re likely to get payment. With some companies, your invoices aren’t even looked at until they’re due—which means that any problems that come up will be handled after your invoice has already sat on your customer’s desk for a month. Even a chat with your customer before you send out your invoice can help eliminate that wait.
The key points to focus on in such a discussion are the items that will be on your invoice — not only the total amount of the invoice, but a break-down of the individual items. Even if your invoice is virtually identical to your estimate, your customer may not remember each piece of the whole cost. It’s also worth checking if your customer’s accounts payable department requires any special information on the invoice.
For instance, some big corporations require all vendors to use an invoice format they provide and if your invoice isn’t in that format you won’t get paid. That’s an extreme example, of course, but making sure that you have details like the purchase order number already taken care of can speed up payment.
2. Offer Discounts for Fast Payments
While some businesses are uncomfortable with the idea of offering discounts for customers who pay invoices immediately on receipt, others find it a perfect fit. It’s a choice you’ll have to make for your business. One of the biggest concerns is that you may not earn enough on products or services to be able to offer such a discount. If that is the case, it may be worth increasing prices to create margin for a discount.
Most early payment discounts offer around a three-day window for customers to pay their invoices and receive a certain amount, usually 2-3 percent of the total invoice off. Not all customers will take advantage of such a discount during the economic downturn, slow cash flow is everywhere, BUT for others, the idea of getting even a slightly lower price can make it worth their while to make payments quickly, there must be some of your costumers make good businesses. Do not close the chance by generalization.
3. Consider To Add Payment Options
If you send out your invoices electronically, the addition of a “Pay this invoice now” button can speed up payment, especially with customers who are more flexible on payment terms. There are a number of online payment processors (the best known is PayPal, or any other alternatives that make it easy to accept credit cards), that will help you set up a payment button in a matter of minutes.
Even if you use paper invoices, it’s worthwhile to accept payment online. The difference in the time it takes to receive a check in the mail, take it to the bank and get it processed can be lengthy compared to an online payment option that deposits money directly into your business bank account.
Well, it depends on your ‘customer-relationship’ whether you can easily convince them to pay invoices online, but it can be a worthwhile change for them as well, if only because it gets an invoice handled immediately and allows them to use credit cards even if you don’t accept them otherwise.
4. Schedule A Follow Up To Your Invoice
This is super-important. As a part of your invoicing process, make it a habit to watch the receivable due date everyday. Some accounting software—most of ERP one—have a feature to expose accounts receivable (and payable) at the front page of the interface, so that the users look at it every time logging in. If yours have the capability, set it so.
If not, you can always run A/R ageing and put A/R due date in your Ms. Outlooks’ calendar and set alarm that popping-up. Send a quick email or make a call on that date to make sure that it’s being handled correctly.
However, this isn’t a reminder call, at least overtly. Since many accounts payable departments only start processing invoices after thirty days, touching base on that date allows you to ask if there are any issues now that they’ve looked at the invoice, which means you’ll be able to respond that much faster.
While many customers won’t move any faster if they think that a phone call is meant to be nagging, they will take steps to speed up your invoice if they can see that your call is meant to make their lives easier. Keep your phone calls calm and helpful and you may be surprised by your customers’ reactions. After all, they aren’t delaying payment to make your life harder — often it’s a question of cash flow for them, too.
5. Add A Fee For Late Payments
Late payments can be a major problem for a small business’ cash flow. A fee can discourage your customers from waiting too long to process payments. Unfortunately, it will not speed up all slow customers—you’ll find that some simply consider a late fee or a penalty the cost of doing business on their own terms—but it can also make it easier to cover the problems that a late payment will cause you.
There’s no right amount for a late fee: different customers have different ideas of what would be considered an expensive delay. For an individual customer, something as small as a $50 penalty will catch enough attention to get the invoice paid. For a big company, anything under half the total of the invoice won’t even make a dent. It’s important to set a fee that you’ll be comfortable with using consistently on each customer, however, changing fees may catch a customer’s attention, but not necessarily in the way you want.
The keys for effective cash flow management are two: timing and communication. Basically a treasurer (or chief accounting or the business owner, or whoever manages the company cash flow) would need to fine-tune his schedule for payments—incoming and outgoing—so that he is able to get the most perfect matching of both inflow and outflow of the company cash.
In the first side, yes, building strong relationships with vendors—and bankers (whoever provide loans for the company)—are important. If your company is in a good cash position, ideally you should pay vendors and bankers on time and treat them well. If you’re a good customer and keep them informed of any changes, they’ll be more receptive of any special requests. Likewise with customers, be conscious of timing and communication. Communicate with them as soon as a problem arises so receivables don’t get stretched. Communicate before then, even, so you develop a relationship where they feel comfortable in telling you about potential issues in advance. Just as you should be able to talk to your vendors as partners, you want your customers to do the same with you, right?