CASH FLOW TIPS: Craig Alexander Rattray says there are ways of improving cash flow from customers
If you’re having problems getting payments from customers you could try some of these methods to improve cash inflows:
Automatic payments from customers who pay for an ongoing service or product. This “recurring revenue” is of huge value to any business and means the month always starts with some guaranteed sales and cash in the bank. We work with many clients to introduce a variety of recurring revenue models.
Up-front payments for new customers or those with a poor credit rating. Do not provide credit terms if there is uncertainty over the future payment from a customer.
Ask for deposits or partial payments in advance and/or staged payments as work progresses. In these situations, phase payments with a smaller final percentage and earlier as often formal sign-off from a customer may be delayed for administrative reasons or because a customer knows that they need to make a large final payment. Avoid payment on approval and instead link it to delivery or other milestones under your control.
Incentivise early payments. Consider offering prompt payment discounts but remember the impact this may have on your margins as there is a cost of doing so. If you do, ensure you have compared the cost of the lost margin against the funding cost of the earlier receipt.
Some other useful tips:
By building a relationship with a specific person at the customer, it makes it easier to chase for payment. It also makes them think twice before making late payments. If they only have a few thousand left to pay suppliers and it is between your business and another where there is no relationship, in most cases you will be paid as a result of the relationship.
As part of your ongoing review process, we should also consider customer payment patterns. It is easy to identify those who pay on time and those who are late. However, if a customer is regularly late by a few days because they pay say every Friday, our advice is not to disrupt such payment patterns. Of more concern is the customer that pays on time then is late for a few payments then starts to slip and deteriorate. This is often a sign of a challenging cash flow issue and is a red warning flag.
Open a “number 2 bank account” and transfer all sales taxes that are included in receipts from customers – this is not your money and is only being held by you before payment is due. By keeping it separate you will have fewer issues when the time for payment falls due.
What to do if a customer does not pay on time or exceeds the credit limit in place?
If matters have been discussed between the two finance teams, escalate to a senior member of your customer’s company in the first instance. Try to identify and understand the issues and try to find an amicable way of resolving matters.
Consider stopping services until payment is made and the customer is operating within agreed credit terms.
Arrange a payment plan whereby the customer pays a certain amount every week.
Consider stopping working with the customer completely.
Take legal enforcement action. This is always a last resort as it is time consuming, costly and in most cases is the end of the customer relationship.
Remember that cash inflows are usually more difficult to forecast as they are not within your control. Regular review of cash inflows will improve your knowledge, understanding and visibility and form a key part of cash flow mastery.
Cash Flow Tips appears 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