5 Ways To Get More Cash Flowing Into Your Business
Struggling to get customers to pay you? You’re not alone.
A majority of small businesses around the world (61%) say they have problems with cash flow, and 32% can’t pay back vendors, make payments on loans, or pay themselves or make payroll because of cash-flow issues, according to “The State of Small Business Cash Flow,” a new study by Intuit.
The study was conducted by Wakefield Research last fall; it surveyed 3,000 small business owners of companies with 0-100 employees in the U.S., the UK, Australia, Canada and India.
What’s driving the problems? Outstanding receivables are the cause for many owners. Among U.S. businesses, 33% estimate their company currently has more than $20,000 in outstanding receivables.
One-person businesses often suffer the most because the owners are often stretched thin and don’t always have time to stay on top of invoicing and collections.
“That’s not the reason most of us go into business,” says Vito Mazza, a consultant at Kinum, a collection agency in Northern, N.J. “We have something that will enhance people’s lives and make things better. We want to do good work.”
After starting his career as a teacher, Mazza learned about the challenges of collecting on bounced checks while working in the encyclopedia business for much of his career.
No matter how busy you are serving your clients and doing good work, it’s important to get in front of cash-flow problems or you’ll be too stressed to do your best work for them. Recently I spoke with Mazza for tips on how small businesses can improve cash flow. Here are some takeaways from our conversation.
1. Understand how money depreciates. Many small business owners don’t get on top of cash flow because they don’t understand how much it’s actually hurting their business.
To understand the effects of late payments on your own finances, check out this chart Mazza shared. As you’ll see, if your customers are delinquent on $5,000 worth of receivables, and you operate at a 20% net profit, you’ll need to bring in $25,000 in new business profits (not revenue) to compensate. That’s a lot of extra work to take on.
2. Set clear payment policies. Many small business owners are uncomfortable talking about money with clients. If you’re among them, avoiding the subject could be contributing to cash flow problems. Clients may simply not know when you expect to them to write a check or break out their credit card. “Have a defined policy for getting paid,” recommends Mazza.
You don’t have to discuss payments while actually delivering your service, which may be awkward. If you run a solo medical or dental practice, for instance, you might post a page about payment policies on your website and then make it part of the patient intake procedure to ask for payment upon check-in or upon checkout. A professional services firm might ask for a deposit to commence a big project and state when progress payments are due in the contract.
Consider asking for payment in advance, if this is done in your industry. Intuit’s survey found that 47% of its survey respondents utilize advance payments.
3. Be disciplined about sending out invoices. Whether you are the individual sending out invoices or delegate this job to a contractor such as a bookkeeper, make sure invoices are being sent out according to the rules you established at the outset. If payment is due upon completion of the project, send the invoice immediately upon completion, to keep payments on track.
“You can’t imagine how many folks don’t do that,” says Mazza.
Even one week of slippage can make a difference in your cash flow, especially on a big invoice.
4. Set up regular touch points. If you’re in the middle of a busy season and don’t have time to follow up individually with each client on late payments, consider sending out a mailing to all of your customers, thanking them for doing business with you. That may be all of the reminding you need to do with your better customers.
“What do people do when they get that kind of a letter?” asks Mazza. “If they are a legitimate customer who has some integrity, they say, ‘Oh my gosh! I forgot to pay him.’ They send a check or call and say, ‘Can you take a credit card?’”
The main reason people pay slowly today is distraction, says Mazza. “There is so much going on,” he says. “Invoices things get lost. They put it in a napkin holder or a fruit bowl on the dining room table.” A letter showing your appreciation will often prompt them to look through that fruit bowl and write you a check.
5. Put a system in place for collections. If you’ve tried sending a thank you letter and clients still aren’t paying, it’s time to take more energetic action, lest something unanticipated happens, says Mazza. A B2B client may go bankrupt. If your late-paying customer is an individual, he or she may become unemployed.
“Small business owners think of accounts receivable as money in the bank,” says Mazza. “If you don’t have a system to go after it, it’s not like money in the bank. It’s like money in the garbage.”
Try re-sending the invoice to a customer and phoning with a gentle reminder. If there are still no results, consider outsourcing collections to an outside collection agency. An agency will generally follow up with clients at a faster pace than most solopreneurs can.
Some firms, including Kinum, will send a small business’s customers reminders under the small firm’s own letterhead for a flat fee, to avoid offending anyone with a letter from a collection agency. Fees vary but to give you an idea of costs, Mazza says they average $15 per debt at his firm.
What if six months or a year have passed? Assume your client has moved on from working with you and consider paying a collection agency to go after whatever percentage of the debt is recoverable, advises Mazza. While many owners don’t want to pay a collection agency a fee, that may be better than never receiving any of the late payment. “Right now, you’re giving up 100%,” Mazza says.
Hopefully, it’ll be a solution you seldom have to use again in the future, because you’ve prioritized your invoicing and accounts receivable.
This article was written by Elaine Pofeldt from Forbes and was legally licensed through the NewsCred publisher network. Please direct all licensing questions to legal@newscred.com.
