This is a guest post by Craig Keolanui of SmBizWinningTips.
According to a recent survey, over 50% of small businesses find collecting payments and late-paying customers to be the most challenging aspects of managing their cash flow and payment activities. And particularly for businesses running on low margins, late payments can be a huge setback.
Late payments can cripple a small business with cash flow problems!
Late payments not only reduce your revenue, but they also have you paying for goods (components of a sale) or services (payroll) while waiting for payments to come in. If your sales are increasing, but late payments are also taking off, you will have a revenue shortfall when you start paying your bills.
If you are not completely on top of your books, this can sneak up on you right when things start getting consistently busy. The joy of increasing sales can quickly be extinguished by the angst of having to call for payments when it comes time to pay for supplies or payroll. You have to do whatever you can to encourage early payments while deterring late payments.
There are several steps to take to encourage early payments. Invoicing in a timely manner goes a long way, but you can also try:
- Invoicing twice a month. Some companies cut checks on certain dates and you might receive half of the usual monthly activity a little early. Keep this in mind also for accounts that are getting bigger or keeping more money tied up.
- Make sure to establish contact with accounting departments at any of the businesses with delinquent account activity and send them email reminders after mailing each statement.
- Encourage paying off invoices as opposed to waiting for monthly statements.
- Give a credit on the next statement for any early payment. You can also set up a rewards program or discount for companies that pay before 15 or 20 days.
- When setting up accounts, give some kind of one-time credit or discount for any accounts that are set up with purchase cards (credit cards!). Accepting them eats into your margin, but you set a firm hook and make it easier to process orders and get paid in full.
Discouraging late payments can also help speed things up. Here are some techniques to use:
- Charge the dreaded late fee. Make sure you spell things out and if you are just starting to establish late fees, be very specific about “invoice dates” vs. “statement dates”.
- Try calling clients who actually place orders to inform them of any issues getting payments out of accounting. Sometimes peer pressure will work better than any call you could make.
- Put up a list of delinquent accounts for staff members to act on if those customers place an order.
- Set yourself up to process electronic payments. Many of these customers can be steered that direction and you can start offering it to others.
Increased sales is a good thing, but making sure you get paid for your sales is critical to keeping the cash flowing and avoiding coming up short.