Small business owners work hard to grow their businesses. They focus on important facets of their business such as product/service quality, customer satisfaction, business development, etc. If they aren’t also keeping an eye on the cash flow, however, they could be on a path to troubled times ahead. I’d like to offer up a few tips on managing accounts receivable to maximize cash flow into the business.
First, take a look at your customer contracts and payment terms. Understand the terms you are offering, and then see what your competition is up to. If you don’t require a deposit, but most of your competitors seem to, you may be missing an opportunity to increase the speed with which cash comes in the door. Unless it’s a deliberate policy to create a competitive advantage (and you have sufficient cash reserves to keep it in place), consider modifying your payment terms to require a deposit. This is especially helpful with establishing payment terms for new customers.
Second, if you offer a service that will take place over a period of time, or you sell a large product that requires manufacture & installation, consider progress billings. You will want to agree to the terms up front with your customer, but establish mileposts to enable billings though out the lifecycle of the agreement. Maybe the terms are: 30% deposit, 40% upon delivery, and the remaining 30% within 30 days of installation and training. This will limit your losses in cases of customers who cannot pay, and increase cash flow into the business to purchase materials, pay employees, etc. during the contract period.
Third, invoice as soon as you have delivered on your commitment (or as soon as your terms allow). The longer you wait to send the invoice, the longer you will wait to receive payment. Consider offering a discount for invoices paid within 10 days if cash is tight.
Finally, establish internal policies to follow up on past due payments immediately. The longer it takes to secure payment, and the more effort you have to put into collecting it, the less profitable that sale becomes. Customers who purchase frequently, but pay late habitually should be assessed to determine if they are truly “good” clients for your business.
Managing accounts receivable involves minimizing risk. You may also want to implement a policy that requires credit checks on new customers so that you can evaluate the risk/reward of a new customer before you’ve overextended your resources on a potential credit risk.