In business, cash is king. Understanding how to manage your cash flow properly will save you from undue stress and ensure that you’re paid for your products or services.
Meticulous cash flow management is one of the most important elements to running a strong, successful business. Cash is needed to complete new projects, pay employees, pay vendors, and pay for other expenses vital to keeping your business alive. Ensuring that your business has enough liquid assets (cash being the most liquid) to satisfy these expenses is imperative if you wish to remain in operation.
However, a challenge that almost every business faces is maintaining this cash flow and ensuring that their accounts receivable (AR) are being paid promptly. Setting terms of payment, then following up with clients that surpass this payment date is essential to maintaining your cash flow; but what are some of the ‘best practices’ for doing this?
“A sale is a gift to the customer until the money is in the bank.”
– Nolan Bushnell, Founder of Atari and Chuck E. Cheese
Getting Paid on Time: Tips to Speed Payments and Reduce Problem Accounts
Maintain Detailed Notes
Keeping a record of customer calls, emails, and in-person conversations will help you determine when to invoice the customer, and therefore when they’ll need to pay. This information can be relayed back to the customer if they dispute charges, or to collection services if you require a third-party to collect on your behalf.
You can never have a paper trail that’s too long – these details are so important when it comes to being paid on time.
Always ensure you invoicing is done timely and accurately. The more days that pass before your business invoices the customer, the longer they’ll have to repay and the more excuses they’ll be able to attribute their late payment to.
Being accurate will also help avoid disputes that arise when the customer receives their invoice. This can often be a messy and time-consuming process to identify the correct invoiceable price, and will reduce the amount of trust that’s held between you and the customer. If you get it right the first time, your accounts will be cleaner and easier to process.
Reduce Payment Barriers to Help Customers
By offering standard payment options such as credit card, cheque, direct deposit and PayPal, your business will:
- Enable customers to pay with their preferred method, which builds trust;
- Eliminate the legitimate risk of customers not having the ability to pay through your payment methods; and
- Eliminate some of the excuses coming from customers who do not have the means or desire to pay.
Managing New Customers
Ensure that upon engagement with a customer, you become registered as a vendor in their system. Ask if they require any information from you to be setup right away, even before your first invoice is sent to them.
Make sure to communicate your payment terms early in the process.
If you start out with a firm payment policy upfront, customers are less likely to be surprised when an invoice is received and more likely to adapt to your payment terms. Make sure to communicate your payment terms early in the process and communicate it throughout your relationship with them to ensure they know when they’re required to make a payment.
Establish a Schedule for Collections
With most computerized accounting or payment systems, you’ll be able to sort and filter late accounts. This process will assist you to identify the most overdue accounts or those accounts with the most amount of money outstanding.
Establishing a schedule for collecting accounts based on these two principles will help you reduce your accounts receivable if you’re committed to following-up. Establishing rules that identify the highest priority accounts will depend on your business, customer base, and repayment terms, however many businesses will prioritize their accounts receivables based on date ranges.
A simple but effective way of prioritizing accounts is to find those customers who are still on your A/R after 30 days, 45 days, and 60 days from your invoice date. Start by contacting those who have outstanding invoices dating back the longest, then proceed through your list until you’ve contacted all customers who have outstanding accounts.
Remain Professional, Attitude Counts
Being persistent often helps speed payment times. From personal experience, I’ve found that some customers pay invoices just to stop receiving your calls and reminders.
Some customers legitimately need to be reminded to send a payment because if they have 100 or more accounts to pay, yours may fall in priority or be forgotten about entirely. It’s unreasonable to believe that all late payments are ill-intentioned, and often all that’s required is to reach out and ask for the account to be paid.
However there are always going to be difficult accounts that despite how reasonable and flexible you are, the customer simply won’t pay. In these situations, the best thing that you can do is remain professional, remain persistent, and trust that the account will be paid in time. As long as the customer is still communicating with you and realizes that they have an account to pay, the relationship can continue. It’s your responsibility to keep the customer motivated to pay and ensure that you do not damage the relationship (potentially sacrificing future revenue for your business).
Fast Fact: A survey conducted by the Commercial Law League of America found that the chances of collecting on an account at 90 days is 72%; after 180 days, 44%, and after one year, 29%
Collecting from Difficult Clients and Those Who Refuse to Pay
When your efforts to collect go unheard what are your options? The key to successfully managing outstanding accounts receivables is to know when it’s the right time to turn for help.
Although it may seem like a helpless situation, there are options. Reporting late payments to the credit bureau is often effective. No one likes a bad credit rating, so for large or repeatedly delinquent accounts, consider calling a debt collection lawyer for legal action, or connect with a company that provides accounts receivable guarantee programs.
Most businesses are hesitant in using collection agencies but if you take the time to do proper research, you will find a company that treats both your business and customers professionally. Most importantly, they will make sure you get paid.
Accounts Receivable Guarantee Programs
These programs provide credit guarantees and cheque guarantees to companies in all industries.
There will always be a small percentage of customers who do not end up paying you. Much like buying insurance to protect against job loss, businesses can buy credit protection to protect them from financial risk of customers not paying for goods and services.
These programs pay you for any past due invoices including bankruptcies, assuming the risk of non-payment and eliminate the need for expensive debt collection services allowing your business to grow risk-free.
Debt Collection Resources
- MetCredit – As Canada’s top collection agency, MetCredit focuses on the ethical and professional collection of outstanding debts in a respectful way that protects your brand reputation.
- Office of Consumer Affairs – Collection Agencies – The Government of Canada has more information that businesses can use to better inform themselves about what to do when their outstanding accounts do not pay.
- TransUnion – Providing advanced analytics platforms for businesses, TransUnion helps businesses to prioritize overdue accounts and track down debtors. Their service enables businesses to identify problem accounts and act quickly.
- VCG Group – Understanding how much credit to extend to customers can be a difficult estimation for many businesses to make. VCG Group will evaluate your current customer base and establish a line of credit that is based on a customer’s activity and credit score. This helps you to ensure that you don’t extend more credit to a customer than they are able to pay for.