The old adage, cash flow is king, has never been so relevant than in the present climate. Business owners who experience late payment of invoices are effectively using their own money to support their customers’ cash position - this can be a very costly habit.
So, how can things be improved?
1.To use a financial services term; Know Your Customer! This means undertaking research to ensure the customer is credit worthy before you extend payment terms – this may not speed cash flow up, but could help avoid a bad debt down the line. If the customer does not have a suitable credit rating, then agree either a sizeable deposit or cash payment on delivery of goods or services.
2.Agree terms with your customer that can be supported within your own cash flow. It is common to extend terms of 30 days and for these to subsequently extend to 45 or 50 days, but do not be bullied in to terms of 60 days or longer without justification. It may be worth considering a discount for early payment, providing profit margins can sustain such action.
3.Ensure you have a clear proven audit trail (ie written purchase order and signed proof of delivery, where possible) and that invoices are issued promptly and contain clear relevant information (eg agreed payment terms and your bank account details). If you are offering a discount for early settlement, make sure this is quoted and that payment is received in line with the discount offered.
4.Adopt an effective credit control system. It is good practice to issue written statements to customers on a monthly basis and record details of any telephone communication when chasing payment on the telephone. There is a clear dilemma between credit control and future sales, but providing you have a clear audit trail and the funds are due, then you should not be worried about asking for payment. Consider putting the customer on “stop” – this can be particularly useful if you have a unique product on which your customer is reliant.
5.If payment is not forthcoming, take professional advice from a specialist debt collection agency or lawyer.
If cash flow continues to be under pressure due to late payment of some of your invoices, you could consider using current debts to raise finance to bridge the gap pending recovery action of the older debt. The decision to look to the bank for an overdraft, or to take up either a full-ledger, selective or single invoice factoring solution will depend on costs involved and the length of time you need cash flow support.