When it comes to running a small business, there are many challenges that you will be prepared for (delivery dilemmas! Setting up your website!) and plenty of tricky scenarios that you will have pre-empted (dealing with potential customer complaints etc.)
Managing cashflow, however, is likely to be one of the biggest and most important challenges you will face and won’t have sufficiently planned for. Making sure your business gets paid can be relatively easy if you are able to take payment immediately. Tradesmen, personal trainers (all professions that are involved in any kind of work which means you come into regular face-to-face contact with your customer) can take advantage of mobile payment solutions to avoid late payments and ensure that as soon as the service has been provided, the money that is rightfully yours is in your account.
But for some businesses this might not be an option. There are other measures you can adopt:
1. Get a Signed Contract
It may be slightly stating the obvious, but before you even begin to think about your invoice, think about the contract. Getting everything in writing means that once you’ve completed the work, there is far less risk that a client will run off without paying or dispute payment terms if there is a contract in place prior to the work being completed. This doesn’t need to be pages and pages of legal jargon, simply an outline of what is to be done and the payment that will be due and by when. If you work with a customer accounts payable department that require a purchase order number on any item, make sure they’ve given you one before you start the work – this provides you with proof that the services or products ordered were correctly authorised. Make sure that contracts are drawn up prior to all of the work you do, even if you’re dealing with your mother-in-law’s cousin’s son who insists you really don’t need one since he’s practically family… You do. Trust us.
2. Have a System
Being a small business owner often means you’re short on time, but it’s worth making the effort to get your invoicing set up properly. Having a process that helps streamline invoicing can drastically reduce the amount of time you spend collecting your hard-earned money – and that’s got to be great for your business. Many systems are now cloud based which have secure back-ups and work much better than having this information on random word documents and spreadsheets. At a minimum, the system used should invoice for you, manage purchases, and give you good reporting functions too. With a decent accounting software package, it can take seconds to create and send a professional looking invoice – so make it part of your daily routine. This will also keep track of which customers owe you money, how much they owe and when they are due to have paid it by. These ‘aged debtor reports’, as they’re known, are vital in keeping you up-to-date with your finances, and alerting you to which customers are late to pay so you know exactly who to chase.
If you’re a one-man band with close relationships with your customers, try and create some professional distance by setting up an ‘accounts’ email address. This will lend an air of gravitas to your business and separate you personally from the often tricky debt-collecting role.
3. Make payment easy
How many forms of payment do you accept? If it is only one or two, you may be handing excuses to slow-paying clients everywhere. Make life easy for your clients by broadening your payment solutions (this may also help to give you a competitive edge). Allowing a number of methods by which customers can pay you will increase the speed with which they eventually do. Don’t forget cash, cheques, credit cards and online payment platforms such as PayPal and Google Checkout as it doesn’t matter what form your money takes, as long as you get the right amount, on time, into your right account. Provide your online banking details as well as address for postal payments on all invoices and contracts.
With payments, make it even easier for your client by invoicing them promptly. Your customers aren’t likely to be in a hurry to pay, so the quicker you invoice, the faster you will get paid. Ensure you provide all the essential information, even if it seems obvious or is a repeat of what is in the contract. Always include a clear ‘due by’ date, so that you leave no excuse for them to delay.
4. Reward the early / Reprimand the late
If margin allows for it, it is often worth offering discounts for early payment. People will certainly be more inclined to pay you sooner if they can pay less – even a small discount might be enough to speed up the process. Tell clients that they can receive a special discount if they pay within a certain timeframe and include this information prominently on each invoice so all customers are aware of the incentive. Typically, it is far more costly to pursue bills that are past due than to spend a little money rewarding prompt payments, plus, you can always incorporate the ‘discount’ into your pricing so that you don’t lose out.
In line with this, charge a penalty fee for late payment which could also off-set early-bird rewards. You can help encourage timely payments by setting a specific fee to be imposed if a particular due date is passed—for example, 30 or 60 days from the date the invoice was issued. Again, make sure this policy is outlined in your contracts, as well as displayed clearly on every invoice so there are no surprises or grounds for dispute.
5. Manage your expectations
Finally, make sure that you are aware of standard business terms; just because you are the new, small guy doesn’t mean you can call for special treatment (unfortunately). One of the first steps for a small business is to work out how quickly you would like to be paid, balanced against the realities of the markets you operate in. It would be lovely to see the cash within 7 days of delivering the product but that can be a wildly unrealistic expectation if you supply companies that automatically expect 90 days payment terms without asking.
It is important that your standard terms are set by how quickly you have to pay for raw materials to provide your product or service. If there is money going out of your account on specific days, make sure that you will be receiving incoming payment from clients in time to off-set this. If your suppliers expect payment in 28 days, then perhaps you should set terms of at the very most 14 days. Again, always print your terms of business on all invoices and contracts so no one can dispute that you haven’t laid down your procedures.
It is also worth keeping in mind that on average, debtors pay invoices two weeks after the due date. So if it’s only been three days and you’re without money for your service, no need for panic stations just yet!