Monday, 6 August 2018

5 steps to getting paid more quickly

Getting paid on time is a common point of pain for many small business owners, especially those who are just starting out. It doesn’t matter how many sales on credit you make, at the end of the day, money not yet received won’t put bread on your table or keep your business afloat. You’ve got to make sure your credits become cold hard cash, and sooner, rather than later. Here are 5 practical steps you can take to speed up your incoming cash flow, starting today.

1. Reduce your credit terms

The first and most obvious option is to reduce your credit terms. In many industries, long payment terms are becoming a thing of the past, when payments made by cheque through the post were common. With invoices now predominantly sent and paid online, many businesses give 14-day terms rather than the customary 30 – and some only 7 days – to pay for their goods and services.

However, before taking drastic action and slashing your credit terms, it may be worthwhile checking to see what your competitors are doing. Your customer base may have come to expect a certain standard, and payment terms significantly under the industry average may alienate them and send them to your competition instead.

Another alternative, especially if you sell expensive services or luxury items, is to offer payment in instalments. Such a solution may help your clients manage their cash flow while you manage yours.

2. Be clear

Making sure you and your customers are on the same page right from the start is vital to a long, healthy business relationship. If you are both clear on when your invoices are due, the likelihood of late payments due to misunderstandings is significantly reduced. Your customers will appreciate your being upfront with them regarding your expectations. Remember that a verbal agreement is not enough, though; it’s really worth making an effort to get your terms and conditions (T&Cs) set up properly, possibly even printed on the back of your invoices. For bespoke projects, an ad-hoc written sales contract will also be extremely helpful should you need to take action in court: it will show that you clearly communicated your payment terms up front. Read our post Tips for setting up trade terms and conditions for some more ideas on how to draft a great set of T&Cs.

Another area that greatly benefits from crystal-clear communication is invoicing. You should make sure your invoices are straightforward and easily understood by their recipients. Take a look at your invoice; how easy is it to understand what it is for? How about when it needs to be paid by? Adding a clear due-by date on every invoice can be incredibly helpful, and has been shown to reduce delayed payments significantly. While we’re on the topic of invoices, evidence shows that making your invoices easily recognisable – for instance by adding your business logo – helps speed up payment, just as having the correct name and details on each client’s invoice avoids confusion and delays.

As a small business owner you may often be short of time, and be tempted to let things run their course. “If it’s not broken, don’t fix it”, as the saying goes. In the long run, though, streamlining your processes, including invoicing, is really worth the effort. By following these best practice suggestions for clear, unambiguous invoices, you will set yourself up for success:

3. Timing is everything

We’ve already seen that adding a due-by date to your invoices helps keep your DSO (“days sales outstanding”, or days receivable) low. Another way to influence DSO in your favour is to invoice as soon as possible – immediately upon delivery of your product or service, if you can. This means the clock starts ticking sooner, and it will be easier for your customer to recall what the invoice is for.

Another component tied to timing is knowing when (and how) to follow up. Don’t wait until an invoice is weeks late before chasing payment. Instead, a good policy is to send out a friendly reminder on the day the invoice is due, or when your customer’s payment cycle approaches. Some larger companies like to process invoices in bulk on certain days of the week or month. Make sure you’re at the front of their mind (in the right way) when that time approaches. If your customer is past due, follow up again with a polite phone call to find out when you can expect payment. Even when your customers might be testing your patience, always strive to remain civil and keep your cool: having the person responsible for Accounts Payable on your side never hurts!

What if you simply don’t have the time for follow-ups? As with many non-core skills, you can outsource it. Ask your accountant if they can call overdue clients for you, or hire a VA – virtual assistants are all the rage right now, as they get paid by the hour and can take on a variety of non-value-added tasks, such as chasing customers for payment. If you favour a more DIY approach to accounting, you can invest in invoicing software that automatically generates and sends out reminder emails when invoices are approaching their due date.

4. Create incentives to pay early

Make it in your debtors’ best interests to pay you early. Provide a discount to encourage payment within 7 days from invoice. Usually, 1-2% off the sum of the invoice will suffice. Conversely, if the due date is past and you still haven’t received payment, you can charge daily interest, also known as overdue fees. Alternatively, you can add a lump sum administrative fee (say, $20) to the invoice for each reminder. Of course, these penalties must be clearly stated in your T&Cs, to which the customer agreed, to be enforceable.

Try not to go overboard with late fees, though, as you may get some backlash from unhappy customers. Consider waiving these penalties for first-time offenders. A few weeks’ worth of interest won’t make much of a difference to your bottom-line, and allowing a grace period on a delayed payment will show goodwill on your part. Customers will remember that you’ve helped them out in a time of need, and will hopefully do a better job at abiding by the deadlines next time around.

5. Hire a professional debt collector

For pesky debtors who, despite your best efforts, refuse to pay what they owe, it may be time to take the matter to the pros. Debt collection agencies, such as Pro-Collect, specialise in efficiently and successfully collecting outstanding amounts, even from tough customers. However, do not postpone the decision to involve an agency for too long. Studies show that the longer an invoice goes unpaid, the lower the chances of collecting it. Therefore, it is highly recommended that the matter should be referred to a debt collector sooner rather than later. A good rule of thumb is to push the button at 2 ½ to 3 times the usual trading terms of the non-paying/defaulting customer. For instance, if a net 30 (30 days to pay) invoice goes past due, you should think about referring it after 75 to 90 days have lapsed without payment, to maximise your chances of seeing that money in the end.

By following these simple steps, you can dramatically reduce late payment rates, and the amount of time you need to spend chasing your debtors. If a stubborn customer refuses to pay, contact Pro-Collect. We are experts at fast, assertive debt collection, and will only charge you our commission if and when your debtor pays up. If it’s a win for you, it’s a win for us.

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