Good cash management to a business is, to me, akin to a healthy diet for a person. If you eat healthily, you’re fitter, happier, physically, and mentally stronger. Manage the reserves in your business and you can ride out tougher times, invest in opportunities and sleep well at night.
Cash flow is dictated by a whole host of factors. But for some businesses a lot of cash flow headaches can be handled simply by managing their current customers. Slow, difficult, or ‘forgetful’ payers can drag businesses into a precarious cash flow position. Keeping on top of these debtors could bring your business a useful cash boost and save you time.
To keep your debtors in check you need to have robust processes and not afraid to set terms your way. You shouldn’t be afraid to chase what is owed, enforce it and to build a process around it. Here are a few steps you could take today to get paid quicker.
Systemise your invoicing
If you are writing your quotes and invoices on paper or a word processor, STOP.
One of the biggest advantages of cloud accounting software is invoicing. With a little setup, you can establish your desired projects, fees and prices and have them ready to go. In fact, you can even quote or invoice from your mobile phone app these days. Suddenly instead of waiting until Saturday to type out your invoices out, the customer has your invoice in their inbox in minutes, sent whilst you’re on site.
What about reminders? Well, you can automate those. Instead of chasing every week for late payment, why not schedule automatic reminders so the system does it for you? A great way to prompt customers and save you time.
Then there’s payment methods. Online cloud accounting immediately opens the door to payment methods such as PayPal. The more methods customers can pay you by, the more likely they will pay you promptly. These services charge a small fee, but for that you’ll see your cash flow speed up and delight customers with other ways to pay. Don’t limit yourself to BACS and cheques!
Finally, if you have repeat custom, then there is another tool available to you. You can encourage your customers to set up a direct debit mandate. It’s secure and gives you the ability to invoice them without fuss. No chasing, no standing orders. Simply select the option when you invoice the customer, and it will do its magic. The go-to tool for us, which integrates wonderfully with Xero and QuickBooks amongst other tools is GoCardless. We could not recommend it highly enough. Again, you pay a small fee, but the time saved in not having to chase your customers immediately makes it money well spent.
With digitised, cloud-based invoicing on the go, you are invoicing consistently and quickly, saving time on chasing, and offering more options to your customers on how to pay, which will only make you and your business look better.
Another quick tip. Something we implemented for a client is a recurring report that is emailed every week that highlights all current outstanding debtors. This alone helped spot a few mysterious debts they could quickly chase up. For our client, it works particularly well alongside the bookkeeping we look after for them too so they’re always working with the latest information.
In QuickBooks, it’s really easy to schedule the report to go to your inbox every month, week or even day. If you want some help setting that up, get in touch today.
Outside of software, putting in place some simple terms with your customers could help.
Payment terms is a good starting point. 30 days is usually a default, but why not 14, if any at all? All too often, businesses apply 30 days as the de facto time limit. But in most cases, it isn’t necessary. It simply keeps you out of pocket longer. Think about the customer and whether payment terms are a necessity, or whether you might as well stick “due on receipt” on the invoice.
You may want to offer an incentive for prompt payment such as a discount. This might encourage customers to settle a lot earlier than they otherwise would. Of course, that discounted amount could always be what you would have charged anyway. You then make the ‘normal’ price simply your desired fee with a premium on top. Win-win.
The alternative approach is a late payment fee or levying interest on your payments due. Whilst this is completely fair to do, it’s a little more negative, so think carefully about adopting this one. Make sure too your rate of interest is an acceptable one; HMRC has some guidance on commercial rates of interest.
Think as well on whether a contract or agreement could help. For big jobs, it would be wise amongst other things to make sure you have an agreement that clarifies what you will provide and what you expect in terms of payment.
Payment up front
Particularly for businesses in the construction sector, where you may have parts to purchase or subcontractors to pay, don’t be afraid to request part payment up front. It’s perfectly acceptable and goes some way to protecting your exposure to spending up-front only to have a customer dodge payment later down the line.
For the bigger jobs you do, even if it is a service you provide, consider making this non-negotiable. As even if you are only out of pocket on time, it is still ultimately costing your business.
Chasing debt, politely
Don’t ever be afraid to chase debts. People fear a difficult conversation, but in most cases, customers have simply forgotten or have an understandable reason. Provided you are polite and professional, you should never worry about following up a debt.
As per the above, you can even have the system handle it for you with impersonal system reminders which may mop up most of your outstanding bills straight away.
Invoice factoring, or otherwise known as invoice finance or debt factoring is a way of gaining access to your cash flow from invoices raised for a fee. You are essentially selling your sales ledger to someone else to look after (a factor).
When you raise an invoice to the customer, the factor will make available immediately a percentage of those funds, typically 80%. They then chase the payment on your behalf. When they receive the payment from your customer, they will pay across the rest of the funds to you, minus a fee.
Invoice factoring is quite good if you have clients who are slow to pay, or if you have large payment terms and it could address cash flow uncertainties for you. They also usually have credit control facilities which means the chasing of debt is essentially outsourced. However, be careful of the terms and contract you enter into, particularly long contracts that could be costly to exit. You are also handing over your sales ledger to a third party, including how your customers could be contacted and addressed. Would you be comfortable with that?
You can even investigate non-recourse factoring, where the factor takes on the risk of the bad debt and can even pursue legal action. This comes with a greater fee, given they are taking on more risk.
Thinking differently about revenue
I’m a big fan of the subscription model. It gives you assurances about your cash flow, a regular stream of income and encourages broader relationships with clients. I encourage you to see if you can find a recurring revenue stream in what you do.
The subscription model is big, and businesses are finding more creative ways to introduce it into what they sell. If you have a business where you could see repeat custom, really think hard about whether you could offer what you do as subscription service or product with a monthly fee.
What about big customers who call the shots?
There are always going to be those large customers who call the shots. Non-negotiable payment terms. Insistence on their own ‘unique’ way of invoicing. They very much adopt a “my way or the highway” approach.
This is a difficult situation. To them, you could be one of many suppliers. To you, they could be your biggest customer. This means being as insistent on how you conduct business may not be practically possible.
The important thing is to plan. If you are not getting cash for 60 days, can you manage? Do you know what your cash flow would look like without that payment? Factoring as mentioned above could be an option for you too in this case.
Overreliance on one customer will make this a challenge. In the short term it probably is a no-brainer to accept the work if it is lucrative and helps you meet your initial goals. But in the long term, think about how you can diversify your income so you are not overly reliant on one customer who can dictate payment terms to you.
What if they don’t pay?
Sometimes, you will just get those customers who simply won’t pay.
First, it is always worthwhile to have another check of the invoice to make sure it is clear and correct and there are no issues. Check your software has operated as intended, for example it didn’t fail to send an invoice. Check your contact details – is the email address correct?
You should always try politely to pursue your customer in the first instance. See if you can speak to them and understand their circumstances. Maybe they have a dispute with the product or service provided. Or alternatively consider agreeing with them a payment plan if they are short of cash.
If after this you still do not receive payment and your typical reminders are going ignored, consider a formal letter, possibly from a solicitor, to chase the debt. Failing that, consider using a reputable debt collection agency or going to small claims court. Seek legal advice when you can.
Throughout the process, keep records of invoices, agreements, chasers and contact with your client, so you can demonstrate you were clear and up-front and that you made reasonable and repeated efforts to chase the debt.
You need to consider whether the value of the debt is worth this and your time. It simply might not be and sometimes you should not be afraid to write off the odd debt if it’s pragmatic to do so.
Cash flow forecasting and planning ahead
All this is of course to ensure your cash flow is protected and as mentioned earlier, cash flow is driven by several things. Debtors are one part of the puzzle and undertaking a cash flow forecast could identify more areas where you can look after your cash.
We are always keeping an eye out for the latest tech and tips to manage cash flow and keep those debtors down for our clients where we can. if you can spend less time chasing debt, you can spend more time growing your business or with your family.
Is cash flow is a challenge for you or you want your debtors down? Get in touch today to see how we can help.