Cash is the lifeblood of any business. As humans need air to breath and food to eat, your business requires customers that provides the primary substance that keeps a business in business: cash.
But in the real world, businesses that invoice their customers for payment can face a challenge in getting paid, especially when the customer may be another business or a government agency. Somehow the terms “NET 15, NET 30 or DUE UPON RECEIPT” seem to go unnoticed by the customer and the invoice doesn’t get paid until 60 to 90 days after the work has been performed. In other cases, the invoice may be paid after 120 days – if not paid at all. For the seller, this can be the start of cash-flow challenges, which can rapidly escalate into a crisis.
In spending over 10 years working to help turn around financially troubled businesses, I have found that the key to better cash-flow is to ensure that the business implements a system to get their receivables paid quicker and faster, with less pain for the customer.
Here are eight ways to start improving a company’s cash-flow today:
1. Give a Discount for Paying the Invoice Before the Due Date: Offer an additional percentage off or maybe a fixed dollar amount off of the total invoice if they pay within 5 days of the invoice date. This strategy works well because it provides a win-win situation for you and your customer. If they pay before the due date, they will save some additional money and you will be paid a lot faster. If they do not take advantage of your generous offer, they will be responsible for the balance owned. It also helps keep good customers because you have provided an incentive for them to continue to do business with you.
2. Have an Internal Collections System In Place: More often than not, a small business will focus so much on acquiring the client and performing the work that it doesn’t dedicate as much time and effort to collect payment. Make sure you send your invoices out immediately upon completion of your work or shipping of your product. If you have the resources, have your staff send a friendly email reminder or make a phone call ten days before the due date (if it’s a Net 30 or more term) to the customer reminding them to make payment.
3. Accept Credit Cards: One of the simplest ways to increase cash-flow is to accept credit cards. Once the charges are made, the money is transferred to your account, usually by the end of the business day, or in some cases, instantly. Studies have shown that people and businesses will spend more using a credit card than they will with cash. Offer your customers the ability to pay their invoices via credit card and your sales will increase. Because there are thousands of credit card processors in the United States, you are in a position to compare and negotiate processing rates and equipment rental fees.
4. Accept Checks By Phone, Fax and the Web: This is a very easy way to have your customers pay, with little hassle. There is inexpensive commercial software available for purchase which will allow you to create a check from your printer, based upon a check that your customer faxed to you, or gave to you over the phone. Also, there are online services available which will allow your client to “write” a check over the Internet, email it to you and then you can print it and deposit it to your bank account. This is especially a great tool to use to improve cash-flow because while it reduces the wait time for receiving payment, it also reduces the time for the bank to clear the payment if it is drawn on a non-location bank.
5. Consider Accounts Receivable Financing/Factoring: The process is simple: when a company sells a currently due invoice from a credit-worthy business customer to a third party (The Factor) in exchange for getting that money today. The factor advances a certain percentage of the total amount of the invoice and holds a percentage in reserve. When the customer pays the invoice, the factor releases the reserve, less the agreed upon fee (discount rate). With factoring, your company's credit is not evaluated -- your customer's credit is. Factoring can be used as temporary or alternative financing for many businesses. Traditionally, manufacturing companies used this form of financing but today factoring is available to many other companies ranging from construction, import/export, distribution -- even companies that provide services to government entities.
6. Consider Purchase Order Funding: If your businesses provides services to other companies that require purchase orders, you can secure short term funding to be used to finance the purchase or manufacture of specific goods that have been pre-sold by you to your credit-worthy customer. This type of funding entails issuing letters of credit or providing funds that allow clients to secure the inventory they need to fulfil customer orders. This frees up existing cash that your business has on-hand for other use.
7. Have a Referral System: Word of mouth marketing is the most powerful and cost-effective way for a business to acquire new clients. People like to do business with those they like and trust; the same is true for businesses. You need to have a referral system in place with your existing customers, business partners and even your employees to help them to refer you business. A great book that will show you how to develop a word-of-mouth based marketing and referral system about this is The World’s Best Known Marketing Secret by Ivan Misner, Ph.D., who is also the CEO and Founder of BNI (Business Network Int’l) , the world’s largest business networking and referral organization.
8. Create a Rewards Program: Almost every major business – from supermarkets to office supply stores to credit cards– has a rewards program. Some offers discounts to its customers in the form of a credit towards a future purchase, or special product incentives (i.e. buy one get one free) or in some cases even cash-back. You can create your own rewards program as a way to retain and reward customers who pay their bills on time or ahead of time. The cost is minimal to your company and results in future, higher value purchases with an increased frequency, and customer loyalty. You can also implement a rewards program as part of your referral system.
By implementing some or all of these strategies, you can help ensure that the cash keeps flowing and your business remains a viable entity.
© 2005, Timothy M. Houston. All Rights Reserved.
Timothy M. Houston is the President of Houston & Associates, a commercial debt management and business consulting firm based in Staten Island, New York with affiliated offices in Texas, California and Florida, ( http://www.houstonandassociates.com/ ).
In 2005, Tim launched SmallBizSaver.com ( http://www.smallbizsaver.com/ ) which is dedicated to helping small businesses to stay in business.
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