As a small-business owner, collecting the money you are owed can be critical to your success. Especially in light of what is happening in the economy now, the ability to increase cash flow is imperative. Unfortunately, many of your customers might also be experiencing cash-flow problems now, which means that they are taking longer to pay their bills while waiting for their own income.
The consequences of even a few customers not paying can be dramatic for small business owners. You can take several steps at the beginning of a customer relationship that will increase the odds of being paid. Here are 5 steps that can help.
Step 1: Check Credit
At the beginning of any relationship with a new customer, you have the best opportunity to protect yourself. Before you offer any customer credit, it is a good idea to get a credit report done. If the customer will not consent (in writing, by the way) to your doing this then we suggest you make them a cash customer. While there may be some expense to you to get a report, it is likely to be cheaper than extending credit that you never are paid back. If they balk or refuse, “cash only” is the only way to go.
Step 2: Review Your Contract
Make sure your forms provide protection for you in the event of nonpayment. Before you send out your first invoice, you should have a completely filled-out vendor form that provides you with details about the customer and—most important—financial information, including where they bank. A continuing personal guaranty for any corporate debt should be required as well. Your form should also make provisions for late charges and—my favorite—attorney's fees.
Step 3: Set Boundaries
Make a decision about when you will drop a customer if they are not paying. You should be tracking how many days late payments are. Your QuickBooks can age your receivables for you. When clients get to 30 days, contact them and talk about what is going on. If you think that the delay in paying is a temporary condition you probably want to continue to work with the customer, but keep them on a short leash. If you are sensing that the customer might be in a serious financial problem you have to consider making the difficult decision to cut them off. Communication is obviously important. When you make decisions about allowing the customer more time to pay, keep in mind that this decision will affect your profit margin not just your cash flow.
Step 4: Be Ready for Objections
“The check is in the mail” is a cliche that we all know to be meaningless. When confronted with this, meet it head-on with an offer to accept a credit card payment or PayPal. You may also consider telling the client that you will send someone to pick up the check or cash.
Step 5: Have an Out
When in doubt, discount. While no one likes to reward clients for not paying, sometimes having fewer dollars in your hand now is better than not being paid at all. Don't be afraid to give a deep discount if your client is having problems. Giving up 10%is a lot less than you will give up to a collection agent or law firm.
Questions about How to Increase Cash Flow?
Having a business coach in your corner is smart to set up your processes and systems. But having legal advice is invaluable when those systems fall through. Poulos Law Firm can help you develop contracts and legal documents to protect your business. And ultimately, that can help to increase cash flow. Contact us to learn more.