As a small to medium sized business owner, you understand that cash flow is everything. While a big number on your receivables line does make your profit & loss statement look good, it will do absolutely nothing to help the daily operations of your business, if you can’t collect. In order to meet the demands of payroll and other obligations, you have to convert receivables into cash as quickly as possible.
One way to convert receivables into cash faster is to ensure that your clients always pay on time. Of all the services you provide and all of the hats, your business wears, “lending institution” should not be one of them. If your clients are not paying on time, you are, in effect, offering to finance for them. Here are a few suggestions to help you turn your services into cash faster.
1. Stay on Top of Your Billing
This sounds like common sense, but you’d be surprised at how many businesses put billing on the back burner. Buyers will take their cue from you. If you are lackadaisical in your billing practices, clients will assume that payment is not urgent and will be more likely to pay late.
Make time at least once a week to go over your billing, or hire someone to look after this regularly. Send bills out to clients and politely demand payment upon receipt. You won’t get paid for work that is not billed, so take the first step and make sure your bills are sent out promptly.
2. Accept Electronic Payments
We live in a fast-paced world where money and goods flow quickly from buyer to seller and from client to vendor. If you only allow your clients to pay by check, you will find that it can take longer to get paid.
Many small businesses refuse to accept credit cards because of the fees associated with a merchant account. Depending on the scale of your business and your client base, this may be a valid argument. However, in most cases, you are losing money by not accepting credit cards.
The expression “time is money” is nowhere more applicable than in the world of business. The longer you wait to get paid, the more expensive other aspects of your business become. Merchant processing fees are merely a necessary premium you pay to get your money faster.
When considering payment methods to accept, you should also explore the wide-world of cloud-based payment management. Services like QuickBooks, PayPal, and others allow you to send electronic invoices with an integrated payment button that allow clients to click and pay immediately. This eliminates several steps in the process and shortens the time you wait to get paid.
3. Automate Payments
We’ve talked about staying on top of your billing and the importance of electronic payments, but to take it one-step further, let’s examine what automatic payments and recurring billing can do for your business.
If you are working with a client on a regular basis, you can ask for authorization to set up an automated billing schedule that will run their card, ACH, or other electronic payment at a pre-determined time. Payments can be for a set amount on a regular schedule, or you can agree to provide an invoice in advance that will run at a designated time after the invoice has been provided.
Automated billing and recurring payments take much of the hassle out of collecting receivables. The less time you have to spend with receivables, the more time you will have to spend on other aspects of your business.
4. Require Payment in Advance
If you find that clients often want to dispute charges, or generally take a long time to pay after work is completed, you should consider asking for payment in advance. Depending on your industry you could likely get away with asking for half or more of the invoice up front.
Another approach is to ask for a refundable deposit before starting work. If you have an ongoing relationship with your client, you could also consider a retainer fee, paid each month as a type of deposit for work to be performed. Deposits and retainers put you in control of the money, instead of waiting for your client to pay at the end.
Remember that time is money. Every effort you make now to streamline and accelerate the collection of your receivables and cash flow will pay big dividends down the road.
Read other articles on Small Business Finance