CASH FLOW TIPS by Craig Alexander Rattray, the first in a weekly series of guides for owner managers
Credit terms and cash collection processes are a key part of good cash management.
Intuit QuickBooks report stated that one in seven companies have been unable to pay employees because of late receipts from customers.
Late payments not only damage the companies involved, they can take their toll on the business owners personally with respect to their health and relationships.
How do we improve cash inflows from customers?
- Invoice faster – As a starting point, we should invoice as soon as the work is done, services are provided, or products delivered. How frequently and when do you invoice? If not daily, why not? Why wait until the end of the month? That only delays the customer receiving the invoice, processing it, and waiting for the credit terms to expire before paying.
Ensure all invoices have the correct details to avoid unnecessary delays – this includes the correct company name, address, sent to the correct person and outlining the work done or service provided. Be clear on credit terms and show the due date on the invoice for any avoidance of doubt. Issued invoices should be sent electronically.
- Provide clear credit terms and due dates – Do you provide credit terms? Are these confirmed in writing?
If credit is being offered to customers, we encourage the use of a credit application. It is important to know who you are dealing with – remember it is not a sale until the cash is in your bank account. This could be a standard form emailed to each new customer or even better, downloaded from your company website.
It should request all the usual basic company information including full name, company number, details of directors, and anticipated trading levels as well as credit limit requested. The company can then be credit checked by one of the online credit reference agencies (and additionally, with two of its current suppliers by way of a reference) and a credit limit assigned. This can be added to the accounting system and certain flags highlighted when the customer starts to trade close to its limit or indeed goes above that. The customer can be notified of the credit limit, credit terms and provided with the full trading terms and conditions. This can assist if there is ever a dispute.
- Follow a clearly defined credit control policy – What is your debt collection process?
Automatic electronic reminders can be generated from most accounting systems.
This can be followed up with credit control calls a few days before payments fall due. This not only builds up a relationship with a customer contact and is good customer service, but it creates a pattern that your customer knows you will chase for payment. That makes it more likely that they will pay on time in preference to those customers who do not follow such routines.
- Review the outstanding trade receivables and trade debtors schedule – This should be reviewed weekly and if you have a dedicated person, they should be chasing and reminding customers daily.
Review the ageing schedule and in particular the columns showing 30/60/90/120+. We like to ensure that there is an action for every invoice over 60 days and responsibility is allocated for resolving any issues. This makes for easy follow-up and review and we guarantee that it improves cash collection.
- Understand your days sales outstanding and the financial impact – For example, if your credit terms are 30 days and the days outstanding are 65 there is a mismatch and a big problem. Why are your customers paying late? You must understand why and do something about it. Remember, a sale is not a sale until the cash is in your bank account. If a customer subsequently fails to pay, you lose not only the profit that has already been accounted for, but you also lose the cost of the product delivered or time incurred by your staff in providing the service.
How can customers pay you?
Online and electronic payments should be the standard method of receipt. It avoids delays and awaiting checks/cheques clearing. Accept multiple payment methods particularly credit card as those customers who are struggling with cash flow issues often revert to credit cards as cash reserves and bank facilities are eroded.
Consider the use of online payment portals like Stripe and PayPal – you have the option of passing on the additional costs to your customer.
Cash Flow Tips will appear here every Thursday
Extracted from Mastering Cash Flow For Business Owners by Craig Alexander Rattray and Jeff Borschowa, available on Amazon, priced £6.95
Craig writes a column for Daily Business on alternate Mondays