You’ve got a great business. You provide first-class service and products to your loyal clients, who come back again and again. Sales are up up up, and you’re way over your projected targets for this year. So, why haven’t you got any money in the bank?
Is your business subsidising your clients’ profits at the expense of your own? How often do you get to month end, and have to juggle finances and top up your business account to pay your staff? Or pay your taxes?
Take heart, it’s a familiar scenario for many businesses. On paper your finances are very healthy and growth is good, but in reality your growth is hampered by your debtors. The market is competitive and in order to win and keep customers you must also charge for your services competitively, and do so in good faith; always assuming that your clients will pay promptly. You, and even your staff often put in several hours of effort a week towards chasing late payments, which is unpleasant and can damage your relationship with your clients (you have to bring up the tricky topic of money which can spoil your discussions of the exciting developments and progress of your projects).
If this sounds like you, then you need to stop and consider: How much is this really costing my business?
Look at your aged debtors list – how much do your slow paying clients owe you? If you could rein in this money would it solve the problem? Also total the working hours that you and your staff spend chasing these payments each month. How much are those ‘working hours’ worth to your business growth? Could they be more profitably spent – marketing, sales, product development?
Remember cost is not just about cash – think of the value of your client relationships, and your / your staff’s morale. It’s damage all over! It’s time to overhaul your systems and develop a smoother way to get that cash coming in.
Read our countdown to smooth cash flow for help:
1. If you have terms and conditions for your services it’s time to update them. If you don’t have terms and conditions, WRITE THEM TODAY! If you provide a service or product for which you invoice your clients, then T’s & C’s are an absolute must. They can include all sorts of information, such as your service delivery time-scales, your returns policy, and most importantly of all: your business payment terms. Think about timescales. Do you want invoice settlements within 14 days? 30 days? It’s up to you, but make sure this is clearly stated in your T’s & C’s and of course on the invoice itself. Next you need to imagine (heaven forbid) that a client is late in paying you. You are entitled to add interest and / or late payment fees to your invoices should payments be late. Make sure you also add these terms to your T’s & C’s.
2. When you quote for any new business, whether with existing or new clients, ensure that you include your T’s & C’s with your quote and clearly state that accepting a quote also means that they are accepting your T’s & C’s. You could even have a tick box that they must sign and return, or demand written confirmation of accepting a quote via email if appropriate. This will set a correct tone for your future business relationship.
3. Keep your clients details up to date on your system – you should already know your clients invoice address, but if it helps, get the name and contact number of the person who deals with remittance for your client – this way if you ever have to discuss the tricky subject of money, it won’t be with the person you’re trying to discuss your project or products with!
4. Get good credit control systems in place. Write a series of standard ‘chasing letters’ that can be sent out to remind your clients to pay. Standard letters are very useful, as once written they can be employed at a simple click of the ‘print’ button – hardly any effort required. This could be a 20 minute job on a Friday afternoon: check the business account for payments received, and cross reference with your invoice list. Quickly print out letters, print copy invoices and you’re done.
As an example, letter 1 could be sent the day after the invoice due date, kindly reminding clients to pay you and include a copy of the original invoice, or a statement. Letter 2 could be sent a week later, reminding clients again, and warning them that unless you receive payment in x days, you shall send a new invoice with late payment interest / fees added, as per the agreed T’s & C’s. Letter 3 could be sent at x days, with the new invoice with added fees, and a warning of further interest to be applied. Offer them to call you to discuss payment options if they are struggling to pay. Letter 4 could warn against court action etc. The more you are on top of your clients the less they will mess you around.
5. Most businesses have a really good client, with whom doing business is a pleasure, yet historically they are terrible at paying on time. They may have cash flow issues too, but that is probably because they’re paying one of their other suppliers on time! There is no harm in asking your client for payment up front for future services; how much they pay in advance is up to you – but be assured that they need your service and so will do what they can to rustle up the funds. If they can’t pay you now, they may not be able to pay you in the future either. Let’s be honest – who needs a client like that? No matter how well you get on with them?!
6. When you discuss payments with clients always be clear about timescales and jot down what you have discussed. You can always confirm your discussion in a quick email to them so that you have it written down. If they promise to pay at a date in the future, make sure this date is in the diary and keep on top of it. If they haven’t paid you can start sending your chasing letters out. It’s so important that you don’t ease up – the minute you cut your clients some slack, they’ll know that they can take advantage in the future.
7. Do consider employing an admin or credit control person to chase debt for you – then you are free to use your time for your true business talents.
There are also professional credit control companies out there that you can outsource to – they have the systems already in place, they are professional and will be able to chase your debt without damaging your client relationships.
You may consider Factoring companies – they are in the business of buying your debt list at a discount price, in order to make a profit from collecting them for themselves. But remember – you will face huge losses if you take this option – so take time to think before factoring.
Over to you….
We’d like to hear your business story and how you managed your cash flow! Leave your comments – for the greater good!