The Art and Science of Cash Collection
A recent report by Dun & Bradstreet stated "new data reveals nearly half of all companies operated with negative cash flow throughout the last financial year. The report also stated that "more than 80 percent of business failures are related to cash flow pressures rather than poor sales.
Many firms with large profits fail to manage their costs and collect enough cash in a timely manner to meet ongoing commitments - these firms often end up failing as a result of negative cash flow. This situation occurs despite the firm making sales and booking revenue".
One of the biggest contributors to negative cash flow is poor payment collection from customers.
Few business owners enjoy chasing customers for payment. The answer to removing this onerous burden is to systemise the process and put someone in charge of it.
Here are some of the key elements of a good Customer Payments Process
Management
Once you understand the impact of poor collections on cash flow, it's easy to see why it needs to be proactively managed, rather than handled on an ‘ad-hoc' basis. It really is worthwhile to have a good system in place for managing customer payments.
Reporting
It's very hard to chase people for payment if you have no idea who owes what. If you can easily print out a report showing who owes how much and for how long you are well on the way to getting paid. Most good accounting systems have this function and it's not difficult to get it working properly with the right operator or good advice.
Responsibility and Procedures
If you want a job done right, it needs to be on someone's job description and they need procedures to work within. Often collection gets handed to the business owner or bookkeeper and neither one has the time or enjoys the task. If this is the case it's better to find someone else to do it. We have had some terrific people in our business doing this job and it has made a big difference to our cash flow. Interestingly a receptionist or someone who enjoys being on the phone is often a good person to do it. They just need good procedures and supervision to guide them through.
Invoicing
The quicker you can invoice a customer the quicker you get paid. I'm amazed when business owners say they wait until the end of the month to do invoices. Why would you give people up to another 30 days to pay you? It's also important what the invoice contains. The ‘Terms of Payment' or ‘Terms of Business' is an important inclusion, but what's even more useful is to state the actual due date to avoid confusion or customers making up their own interpretation. Also addressing the invoice correctly can save heaps of time waiting for it to arrive at the person who can authorise payment.
Deposits and Progress Payments
Depending on the type of business you are in, it might be quite reasonable to ask customers for an up-front deposit. This goes a long way to helping to cover costs associated with a job or production. If a job is going to be in progress for a while agreeing on ‘Progress Payments' is another great way to help your cash flow and cover costs rather than waiting to the end of the job to ask for payment.
‘Terms of Trade' or ‘Terms of Business'
A clear understanding up-front by the ‘Buyer' and the ‘Seller' goes a long way to avoiding any confusion down the track. Very few businesses actually have clearly stated ‘Terms of Trade'. They aren't hard to find over the internet and some lawyers have standard templates you can use. If your business is a little complicated it may be well worthwhile to pay a little extra and have tailored ‘Terms of Trade' produced. The time to broach this subject with a customer is during the ‘Sales Process'. It can easily be given as part of a pack and highlighted by the salesperson to avoid confusion and delayed payment.
Credit Checks
The title of the article says it all! Customers who can't or won't pay you are not worth having. It's imperative to be confident that your customer can and will pay you. You can run your own checks and ask them to complete a credit application form. People like Dun & Bradstreet will provide credit reports at a reasonable price. It's a worthwhile investment to avoid a bad debt. Do one on your own business to see what information you get! Go to www.dnb.com.au
Payment Methods
Providing as many ways for customers to pay as possible makes it easy. Some people really resent paying credit card merchant fees, but it may cost much less than waiting 120 days for a cheque through the post.
Statements and Reminders
If there is a big pile of invoices to pay and you are the one who sends reminders it's highly likely you will be put at the top of the list for payment. If you just sit quietly and wait you can bet some customers will take advantage. It's not difficult nowadays to shoot off a batch of emailed statements or a reminder letter to those who haven't paid. There are some really terrific systems around that can handle the whole reminder process taking over from your day to day bookkeeping system. A system we use with clients is called ‘Cash Flow Builder', it's a terrific web based system that makes a huge difference to collections and cash flow. It has reduced our own debtor days (average days it takes customers to pay us) from 45 to 27!
Follow Ups
Just like statements and reminders telephone calls are a must if you are serious about getting paid. A system is critical. If you don't keep records and don't have a system and procedures for follow up phone calls, things will quickly get out of hand and customers will run rings around you. ‘Cash Flow Builder' is a great system for managing follow ups and ensuring that everyone involved is informed about what they need to do and when they need to do it. Human beings are fallible but systems keep them on track.
Debt Collection
Many collectible debts are simply written off and it's a crying shame. For the sake of paying a debt collection agency you can get a decent percentage of the debt which is better than accepting nothing. There are many good collection agencies around who will handle the task professionally. I would strongly recommend not writing off a bad debt until you have tried them.
Customer Relations
Good customer relations make a huge difference to how quickly you get paid. If you are in good contact with customers and know they are happy with your service or product you are much more likely to get paid.
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