When I review any business, one of my priorities is how much money people owe you. I’ve seen Ageing Receivable lists spanning pages! All small businesses need cash and here are some simple cash flow tools to help you pull that money in.
1. Deposits Upfront
Reserve the right to charge a deposit upfront prior to commencing work. This may be to cover the value of materials used or simply good business practise. If you quote, chose for example to ask for a percentage of the quote upfront to secure the job and to ensure you are not left out of pocket. This is useful for customers you know are late in paying or new clients you don’t know very well.
2. Terms of Trade & Payment Terms
Your terms of trade are how long a customer has to pay you. Commonly used are 7-days, 14-days or 30 days. For SME’s I recommend 7-days and 14-days. Your payment terms should be included on your quotes and your tax invoices. As soon as the payment term is up, you can follow up on non-payment.
The longer the payment terms, the more likely the customer will put your invoice at the bottom of the “to pay” pile and forget about it. This means you will have to send a reminder but you will have to wait until those 30 days are up. By the time you have sent your Statement, it may be 6 weeks before you are paid if not longer.
3. Tailor your Statements in your Accounting Software
You can tailor your Statements and Invoices in your accounting software. Take the time, 10 minutes spent here will ease the effort of sending Statements to customers at the end of every month. Even if the terms of trade haven’t expired, it is commonly accepted in business to send Statements to remind customers of their outstanding balance. Anyone using Xero the Statements are simple to tailor and will only take you 5 minutes.
4. Discounts & Charging Interest
Discounts are not ideal for optimum cash flow. However they do serve a purposes and you may wish to consider offering a small discount if customers pay by a certain date. Similarly charging interest to recalcitrant customers is not good for small business relationships (note, do not charge interest unless it is already specified in your trading terms in writing).
5. Client Engagement Letter
Set yourself up right. Include your expectations and your terms of trade in a Client Engagement Letter or Quote. Have it signed before you commence work.