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Make Sure Your Clients Pay Up With Financial Management Systems That Work
One of the biggest reasons small businesses fail is cash flow. If your customers aren’t paying you regularly, you’ll eventually run into serious money problems. Here’s how you can make sure you get your moola.
To make sure more money is flowing into your business than out of it, focus on the following key areas that are all vital to your business’s success.
1. Negotiate the best debtor and creditor payment terms for your business
There are two types of payment terms you need to negotiate:
- Get your customers to pay you as quickly as possible
- Delay your payments to suppliers as much as possible
A good balance between the two will ensure you have enough cash on hand before costs need to be paid. This keeps your business cash flow healthy and ensures you don’t use debt to cover your costs.
Ideally, you want clients to pay you upfront, on delivery or at 30 days. On the other side, you want to pay your suppliers at 45 or 60 days.
How can you get clients to pay earlier?
There are a number of ways to encourage upfront or early payments:
- Offer a 5% discount on immediate payments
- Alternatively, charge interest on extended payment terms
- Be careful: Do your numbers. Don’t let the desire to be paid earlier cut into your profits
How can you get suppliers to agree to extended terms?
Some suppliers will agree to extended terms if they receive your full order book. Others require your services, and could agree on a barter system if you help them out. Still others might be cash-flush and happy to help a good customer who is a smaller business because they understand the cash flow issues that you’re facing.
Step one is asking the question. Step two is figuring out what it will take to get a yes.
2. Credit vet your customers
Signing a big deal can be incredibly exciting, but what happens if you spend money to deliver your product or service, and then get paid late or not at all?
If you want a healthy, cash positive business, you need to ensure you’ll get paid for the work you do before you begin doing it. Good debtor management starts before you’ve even signed the supplier or client contract.
What is credit vetting?
Credit vetting gives you a look into a person or business’s credit track record and payments history. The great news is that the data you need is available – you just need to access it.
Why is credit vetting so important?
Credit vetting allows you to:
- Decide if you will offer credit or require upfront payment
- Set limits if you do decide to offer credit
- Prevent fraud
- Establish if prior legal action was taken against the customer
- Protect your business against bad debt
Ultimately, it’s about making sure the customer is a good bet before investing time and resources into delivering on the deal.
How do I perform a credit check?
Now that you understand the importance of credit vetting, how do you get started? Start by vetting the biggest credit service companies in your area to check out potential clients.
3. Collect your cash
A strong collections process is vital to a growing business’s success. It helps you to minimise issues with late-payers or worse, non-payers.
What does an effective debtor management and collections system look like?
Invoice on time: The sooner your invoice reaches your client’s accounts department, the higher on the list you’ll be when payments are made.
Employ a tracking system: A good accounting software system is invaluable for small businesses when they’re collecting their cash. It alerts you of late payments before they affect your bottom line.
Follow up: Being quick to follow up when a payment is late in reaching you. It keeps them on their toes and makes them less likely to repeat the offence. Persistence is key – even if it borders on nagging.
Hand over: Know when it’s time to stop fighting the battle and hand it over to legal. Collection agencies are a last resort for small business collection, but they can often help you get paid quicker than your own efforts.
To find out more about collecting your cash on time, read our guide, Make sure your clients pay up with financial management systems that work
4. Protect yourself with trade credit and debtor insurance
Carrying out all your vetting and payment terms is a good preventative measure. But have you considered insuring your business against your clients’ risk?
What is trade credit/debtor insurance?
Imagine you could keep an eye on your debtors’ book and ensure every amount owed to you reaches your bank account? That’s what debtor insurance enables you to do. Taking out this type of insurance policy protects your income by keeping crucial cash flow coming into your business.
When should you consider it?
When your debtor insurance policy is given to a financial institution, it makes your debtor’s book more valuable because the financial institution knows your risk of non-payment is protected.
This gives you more borrowing power at lower borrowing costs. Here are some other advantages of debtor insurance:
- Risk protection against payment default
- Better financing due to added security for finance providers
- Increased sales potential by enabling you to sell more goods to new and
existing clients while substantially reducing overall risk
- Increases your buying power
- Increases your credibility
- Significantly enhances your relationship with your suppliers, because they know they’ll still be paid if one of your customers default.