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Stop Being Your Customer's Bank

Yesterday we spoke about the MOST IMPORTANT activity a small business owner can perform – managing cashflow. Forgive me if I’m teaching my grandmother how to suck eggs (do people still use that expression?) – cashflow is the flow of actual, real cash in and out of your business. It is NOT what you sold. It is NOT what you invoiced. It is not what you bought. It is the money you ACTUALLY collect, the money you ACTUALLY pay and the money you ACTUALLY get to keep (which is what you want out of your small business, isn’t it?). If we focus on JUST THESE TWO THINGS, your business will do MUCH better than if you focus on almost anything else.

There are a number of activities that will improve your cashflow. The key ones are:

  • Collect your money faster (improve your accounts receivables)
  • Improve your stock/service management
  • Get more profitable customers
  • Get more repeat customers
  • Reduce your overheads
  • Manage your suppliers

Over the next set of articles, I’ll pass on some simple and effective systems and techniques you can apply in each of these areas to immediately improve how much money you have in the bank at the end of each month.

Today we will look at collecting your money faster.

Most non-cash only small businesses have trading terms with their customers. Whether it’s 7, 14 or 30 days, we don’t get the money for the goods and services we provide straight away (and sometimes, ever ). Here are some statistics:

  • A staggering 80% of small businesses fail in Australia because of negative cashflow.
  • In 2010, more than 10,000 Australian businesses closed their doors (which means that 8,000 failed because of cashflow problems).
  • This is up 23% on 2009, so it’s not changing anytime soon.
  • For those businesses that are surviving, there is an average of 53 days between date of invoice and date of payment for businesses. (Dun & Bradstreet study of external administration and liquidation data, February 2011, published in SmartCompany, 31 March, 2011)

This does not even take into account the time involved from when you start to incur costs until you get an order from your customer, which can be months. Business owners, especially small business owners, continue to ignore cashflow issues, instead focussing their attention on the revenue and sales results (which are of course important, but don't tell you whether you can pay your staff, rent and suppliers this week, or how much you get to keep).

When your customers take longer than your credit terms to pay their bills, you start to become their bank. They have held onto your money for 30 days. When they hold onto that money for another 10 or 15 or 20 days, they get to use that money to build their business, whilst you have to pay interest on you small business loan or overdraft, or lose interest on the money in your account to pay your bills when you should have been able to use the money they owe you!!!

So…what can you do to bring your accounts receivable under control and start getting YOUR money faster?

  1. Get the credit agreement signed off. Do ALL your non-cash only customers have written, signed credit terms? How often have you or your sales people been willing to ignore that inconvenient piece of paper because you don’t want to make the customer hesitate to sign on the dotted line? Here’s the bottom line – you will either inconvenience them by getting them to sign a credit agreement, or they will inconvenience you by making you wait for your money and/or having to use your or your staff’s time chasing it. GET THE AGREEMENT SIGNED!!!
  2. Make the payment terms crystal clear from the start. In your conversation with your customer about doing business together, make sure they understand what their payment terms are, whether they are 7, 14, 30 days or something else. Probably one of the most common reasons given that customers pay their bills late is that they didn’t know what the terms were (whether that’s true or not). How can you make it clear?
    a. Have them repeat it back to you when they sign the agreement.
    b. Print in BOLD CAPITALS the number of days and the date due on all invoices.
    c. Send a statement every month showing which bills are due on what date that month.
  3. Do your bookkeeping regularly. When small business owners and managers prioritise what they do each day, doing the bookkeeping, tracking who owes you what, sending out invoices and statements, checking on how your cash balance is doing usually ends up somewhere near the bottom (it’s juts not as sexy as having your hand on the tools, computer or telephone, depending on what industry you’re in). How sexy is it, though, when you get to the end of each month, and you have more money in the bank, every month, than you did the month before? Your bookkeeping IS part of your business. Some would say one of the most important parts. Do it. Alternately you could…
  4. Find a hard-nosed bookkeeper. If you are not prepared to do your bookkeeping regularly, send out invoices on the day you deliver the order, and statements at the end of each month, get on the phone to chase overdue payments and watch your bank balance constantly, then you need to find someone to do it for you. Someone good.
  5. Chase, chase, chase. Get to be known as the supplier who calls the day after a bill is due. And the day after that. And the day after that. “Come on, David, I don’t have time to do that, I’ve got a business to run”. Take your eye off the ball on your payments, and you won’t have to worry about that for long. And anyway, you won’t have to do it more than twice before YOU become the supplier they pay first, because all those other small businesses think they are in the business of supplying goods and services, not the business of staying in business.
    What are some things you can do to make collecting your money just part of the way you do business instead of something uncomfortable:
    a. Call before you have your next delivery or visit with your customer and give them their monthly statement in person the next time you see them. Ask if they can have a cheque ready for you.
    b. Get an up-front deposit from customers who owe you money (it is common to put late paying customers on cash, periodic or milestone payments)
    c. Stop supply. You won’t find a bill get paid faster. Especially if they can’t do business if you won’t do business with them.
    d. Have penalties in your contract and enforce them (you’re paying interest on the money they aren’t paying you, why shouldn’t they?)
    Small businesses that are worried that getting tough on late bills is going to damage their relationships have to ask “What is the basis of the relationship with my customers?” If the customer is not paying you, you haven't got much of a relationship anyway.
  6. Call in the heavies. If you’ve done everything you can do to hold up your end of the business relationship (and probably gone above and beyond), and still aren’t getting your money, outsource it. Unfortunately, many collection agencies get told that the customer was never informed that a bill was more than 60 days overdue (which is about when you should call in the collectors), or had periodic payments offered, or any of the many other ways of collecting your cash before you have to get a 3rd party involved. If you have done all those things and are still not getting any love, it’s time to hand it over to a professional. People will still want to do business with you. Remember, it’s them who aren’t keeping their word, not you!

Some final tips to keep cashflow fitness

  • Don't just send the invoice – call two days later and make sure it has been received. Organise credit card facilities for small payments.
  • If an invoice is not paid on time, call straight away – don't let it drag out.
  • Stick this mantra on your office wall and say it out loud, smiling: "When I have provided the goods or services on time, I am entitled to be paid on time."
  • There are even pre-collection services (eCollect does this) where you can call a customer before the bill is paid and check to see that they are on track to pay. If not, work out a payment plan now, rather than in 60 day's time.

Tomorrow we will look at how to create a cashflow budget, so you know when the peaks and troughs for cash are, and can be prepared for it. Alternately, click on cashflow and it will take you to a page where you can download “10 Questions Every Business Owner Needs to Know the Answers to” - one of Roaring Trade’s weekly book summaries and small business “How To Guides”.

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