Your ideal business may be one where your customers pay for goods and services immediately. If you are like most businesses, providing services to other businesses however, you probably work on a system of credit where they get at least 30 days to pay you. This often necessary mode of operation can spell big trouble though, when those invoices are not being paid on time. It puts a pinch in your cash flow, which in turn, pretty much affects all aspects of your business from marketing to purchasing the products and services needed to run your operation. While any business is prone to late payers, those who truly struggle are not the victims of bad luck, but rather, poor management of their accounts receivables; here are some tips to help you get things on track.
Use Accounting Software
There is no good reason not to be using accounting software if you are dealing with multiple customers on a regular basis; given the availability of low-cost and even free programs out there, anyone can get their hands on a program that meets their needs. Software will make it easier to track payments and the easier it is for you to stay on top of your accounts, the more successful you will be in collecting money. I know a lot of people like to work the old-fashioned way and avoid technology whenever possible, but reluctance to get digital can be hurting your bottom line.
Set Credit Limits
If extending credit is a necessary part of doing business with your customers, it is important to extend it wisely. Setting reasonable credit limits is a key step in ensuring timely payment. Like individuals, businesses should not be spending beyond their means or else trouble will arise when that bill comes in the mail. If the customer is a small business, you should establish a credit limit based on a detailed analysis of their credit situation. For larger customers, or established customers who may not be big businesses, the amount of credit you are willing to extend is essentially based on how much risk you are comfortable assuming. Experts commonly recommend extending no more than 10 to 15 percent of their total sales—no matter what amount, going over 50 percent is strongly discouraged.
Offer Incentives for Early Payment
Everyone loves a discount and it is a perfect incentive to get customers to pay that invoice as soon as possible. One of the more popular forms of this method is offering a 2 percent discount if an invoice due within 30 days is paid in full within 10 days of receipt. While the idea of giving a discount may not appeal to you, it is well worth it if it motivates clients to pay you as quickly as possible—remember the primary goal is to get the cash you need to run your business.
Dealing with Delinquent Accounts
If you have invoices that are past due, you need to get on top of that as soon as possible. If your customer is having trouble paying his bills on time, the vendors who are lax about following up on past due payments are going to get moved down the list; the ones that are persistent in pursuing payment will be near the top. Run reports frequently and make a polite call as soon as a couple of days out—double check that the customer received the invoice and inquire if there are any issues. Be friendly but firm and make sure you end the call with an established payment amount and expected date of receipt. Take notes on the conversation and lead off with this information if you need to call again. Set up a consistent process for handling past due invoices and stick to that process every time.
Considerations for Insurance and Factoring
If you have high value receivables and late payments are a common occurrence for your business, you might consider getting insurance—of course you need to do a detailed analysis of whether this would be to your benefit given the extra cost. Factoring may also be an option—this involves a company purchasing your receivables, which gives you an immediate source of cash. But, this clearly comes with a cost and you need to decide if it is worth it for your circumstances.
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