Archive for the ‘Accounts Receivable’ category

7 Tips for Getting Paid

May 17th, 2013

Not getting paid by clients or customers is one of the most frustrating aspects of running a small business. But when not getting paid impacts your small business’s cash flow, it’s one of the most dangerous, too. What small business owner hasn’t worried about getting paid at some point? Whether it’s the number of customers that are running past due accounts, or the client who seems to be reluctant to pay for completed work, having proactive policies in place that anticipate these eventualities is your best defense.

Here are seven ways to make sure you get paid for the goods and services you sell.

1. Don’t extend credit automatically to new customers/clients.
Small businesses, just like large businesses, need to have credit policies in place that provide guidelines for determining which customers or clients will be extended credit and on what terms.

It may be your business’s policy, for instance, to never accept personal checks as payment, only company checks, debit cards, credit cards or cash.

If you are considering extending credit beyond that point to individual clients or customers, you should have a procedure set up where the customer or client has to fill out a credit application and/or do a customer credit check. The fee for a credit report can seem expensive depending upon how detailed the report is, but it’s definitely money well spent if it prevents you from not getting paid for that big sale.

2. Take partial payment in advance.
If it’s sensible in terms of the price of the goods or services, ask for a deposit or retainer up front. This is an increasingly common business practice for higher-ticket items and services; no reasonable customer should be offended by such a request.

For instance, if you provide services, you might charge a percentage of the projected bill or a set amount as a retainer before you start work on a project with the remainder due on completion of the task. Or break the bill into thirds, asking for a third before work starts, a third halfway through the project and a third upon completion.

The beauty of partial payment is that it ensures that you get paid something even if the customer or client defaults on the rest of the bill.

3. Invoice promptly.
This seems like a no-brainer but many businesses are slow to invoice their clients. And by establishing the degree of urgency with their own example, why should anyone be in any hurry to pay them?

Customer/client invoices should be prepared and presented immediately upon delivery of the goods or services, or as soon as reasonably possible. Not doing so can make your business look indifferent to getting paid and slow down your cash flow for no reason. Waiting to prepare your invoices at the end of the month, for example, you may be adding as many as thirty extra days to your cash flow conversion period. QuickBooks software and Point of Sale systems make quick invoicing easy.

4. State payment terms visibly and clearly.
If you want to get paid promptly, don’t leave it up to the customer or client to decide when your invoice should be paid. Rather than giving them invoices that say vague things such as “Payable upon receipt”, make sure your invoices state specific payment terms, such as “Payable within 30 days” or “Due Date: ____________”. Your invoices should encourage prompt action on the part of your customer.

5. Reward customers for paying promptly.
Offering customers a discount for paying their invoices early, can help you get paid more quickly. For instance, if the usual policy is to have payments due in 30 days, offer a small discount such as two percent to customers who pay within 10 days.

6. Establish a follow up procedure for customers who miss payments.
Even if you’ve never had a collection problem to date, you should still have a system in place for flagging late payments, and a procedure for contacting the customer or client when the payment is late. The more quickly you follow up on a missed payment, the better your chance of getting paid.

Typically, such a procedure starts with a letter that simply states the bill is overdue and requesting the customer’s immediate attention to the matter. Nowadays there are many channels that you can use to contact the customer. Some are more effective than others. If time allows, I recommend starting out with a phone call to “touch base” with the customer or client. You want to come across as friendly and polite, not threatening in any way. Sometimes the person has just forgotten or missed seeing a bill and a quick phone call is all it takes, meaning you get paid and you don’t have to go through any of the rest of the collections procedure.

Sending collection letters via email is nice because it automatically creates a copy of the collection letter for your files, and automatically date stamps your message. However, because of email filtering and email overload, it may not be a very effective way of getting your collection letters to customers and clients. You’ll want to send them in other ways, too, such as regular mail, fax or even courier, depending upon the size and importance of the debt.

7. Turn the overdue account over to a collection agency.
Collection agencies collect debts for a fee or percentage of the total amount owed. This fee is based on how old the debts are (the fresher the better) and how much business a creditor has to offer. Expect the rate for collecting consumer accounts to be higher than for business-to-business accounts. Collection agencies have experience with, and knowledge about debt collection that you, as an individual business owner, don’t have and hiring one can be well worth it, if the amount of outstanding accounts receivable warrants it.

Proactive Policies Are the Best Way to Get Paid

As you can see, the best ways to ensure you get paid for the products you sell and the services you provide is to have proactive policies and procedures in place to cut down on the number of delinquent accounts receivable your small business has to deal with.

Things such as having credit policies in place, performing credit checks, having a partial payment policy and being clear and upfront about your payment expectations, both in person and on your invoices will go a long ways towards ensuring that you get paid, and your small business doesn’t get stuck with a lot of bad debt.

5 Tips for Cash Flow Management

December 18th, 2012

Cash flow is the lifeblood of any business, and in any business there are cash flow dangers. There is a capacity for a business to accumulate costs. They gradually grow month-by-month and your cash flow gradually diminishes to a trickle and finally dries up. Your only defense is to watch, record, compare and trend your costs.

Understanding what the numbers mean is crucial to your cash flow. Are sales trending up or down? Are expenses rising faster than sales? Is one product more profitable or better selling than another? How much do I need to sell to meet expenses each month? The answers all lie in the numbers.

The best way to measure cost trends is by analyzing the expense categories in your software, and ideally graphing them to get a better visualization of their impact. If the chart of accounts in your program is properly designed, you can produce the graphs for each cost item and quickly be able to see that your power bill, for example, is gradually rising. This new perspective can now lead to an informed change in behavior that will reduce those costs or at least reduce the increase in those costs.

Once you have established your costs, you should compare them against the industry average, or at least use your own common sense and business experience. If you keep your books accurate and up to date, you will be able to calculate the relationship between your gross sales and the expenditure in any category. For example, with the help of your historical data, you may decide that your postage should be 2% or 3% of gross sales. When you look over your month-end reports, you may discover that it has risen to 5%. Catching it early, you can now take corrective action.

If you are able to control your expenses, you can develop a healthy constant cash flow. Normally, it’s the cost of your expenses that sucks up your cash and put you in an uncomfortable position.

When your bills are greater than your sales/receivables, your first reaction is most likely that you need to increase sales and collections. Although that is always a good idea, even when there isn’t a cash flow problem, there is still very good reason to pay particularly close attention to your expenses. If when looking at your figures, you see that it takes five dollars to put one dollar on your bottom line, it then takes $5,000 of sales to yield $1,000. This means that saving $1,000 in costs is exactly the same as generating $5,000 worth of sales.

You need to look at your cash flow from an informed perspective. Here are five areas to focus on:

1. Mismanaging Credit
There are two common ways to mismanage credit in small business; granting credit without specific credit policies, and using credit with no plan for how to pay for it.

Both have a huge impact on your cash flow and are often closely related. For example, you have an opportunity to work on a big project, for which you will need to order materials. Your supplier expects payment in 30 days, but you won’t receive cash for the project for 60 days. Right away you’ve put yourself into a cash flow crunch that could take months to recover from financially. In the meantime, you’ve passed on smaller jobs that would have provided quicker cash at less cost. And, if you’re unable to pay your supplier on time, you’ve endangered that relationship as well.

2. The relationship between Receivables and Payables
In a perfect world, what customers owe you would be paid just in time for you to pay what you owe your vendors. But, as any small business owner knows “stuff happens”. The customer you thought would pay this week, doesn’t. So the bills you thought you’d pay this week, don’t get paid. Are your payables in balance with you receivables? If what you owe to others is far more than what is owed to you, then you have a cash flow problem. And if your receivables are particularly old, chances are good you’ll never see that cash at all.

3. Focusing on profit instead of cash flow
Is profit the ultimate goal of every business? Did you know that many businesses that fail are operating at a profit? How can that be? For the small business, cash flow is the ultimate goal. No cash flow. No business.

The difference is mostly in the decision making process. If you take on this big job, it will earn you a huge profit, but if you take on five smaller jobs, you’ll have cash to pay your bills. Yes, you want to be profitable, but every decision has to be measured against the effect it will have on cash flow.

4. Don’t forget your debt to the Tax Man
Some bills are easy to forget. Bills like sales tax, payroll taxes, estimated taxes. They just sit out there, almost off the radar. They don’t have to be paid right away. It’s easy to forget about them. But when they’re due, they’re due right now. And you better have the money to pay them or you’re in hot water with the Tax Man. That is not a place anyone wants to be. Pay them late or not at all and you end up with penalties and interest on top of what’s already due. Using the money that needs to go toward taxes to solve cash flow problems results in even more, and probably worse, cash flow problems when those taxes come due. It can take months or even years to recover.

5. Spending your company’s future on a sailboat
Haven’t you always wanted a boat, a fancy car, or a trip to Tahiti? It might be tempting to try to pass your personal purchases off as tax-deductible business expenses. But, it’s a bad idea for two reasons.

The people at the IRS are over-worked, but they weren’t born yesterday. The last thing you need is an audit that could reveal your transgressions and result in an unexpected tax bill plus penalties and interest. No company’s cash flow should have to suffer that indignity.

The other reason it’s a bad idea is that you are spending your company’s future on unnecessary expenses. Small businesses operate close to the edge. Unless you have a reserve to see you through the tough times, you’re always in danger of being on the wrong side of that edge. You must take care of the cash flow first. Then, you can pay yourself a properly taxed bonus and buy all the toys you want.