Did you know that the reason most businesses fail is that they don’t have enough cash to keep going? That makes sense when you consider how a typical product-based business works. The business pays to manufacture or purchase a product and inventories it until customers buy the goods. Buying that inventory ties up the company’s cash and increases its risks (e.g. damaged inventory, obsolescence when you upgrade). Wouldn’t it be better if you could get paid before you manufactured or purchased your product wholesale? It isn’t always possible, but in an ideal business this element is present.
Collecting fees up-front also makes sense with service-based businesses. Far too many service providers wait 30 to 90 days to be paid. If the service involves some out-of-pocket costs to fulfill, the business has now paid for costs out of its cash flow.
The best business model is one that collects cash up-front as a deposit, a retainer, or full payment before the product or service is fulfilled. Not only does this help with cash flow, it saves your company some of the time and energy of collection.
Here are six ways to lower your outstanding receivables:
- Consider the timing of your bill. Collect up-front. If you can get paid before you fulfill your product or service you can eliminate a lot of hassle and the additional cost of chasing down payment later.
- Don’t wait to bill. If you can’t bill before you fulfill, at the very least give your customers a bill at the time the services are rendered. Remember, the longer you wait to bill, the longer you wait to get paid. Plus you’re more likely to have collection problems.
- Get your clients to prepay an entire year by providing a terrific incentive to do so. This will vitalize your cash flow and eliminate the need for the entire accounts receivable collection process. Incentives could include a special add-on bonus or a discount.
- If your business model must have accounts receivable, front-load the collection process. Send statements out right away and start your follow-up procedures right away. Put your energy into up-front collection when your odds of getting paid are highest and that payment means more to you.
- When you ask for money, make it easy for your clients to pay you. Include a self-addressed envelope. Make sure the invoice clearly says who to make the check out to and for how much.
- Build a “cost” for your clients into your standard contracts. If you’re going to be financing your client’s purchases then you should get paid for your trouble. Make sure your contract includes a monthly financing charge for all accruing bills. Make sure it also states that they are responsible for all reasonable costs of collection. Finally, when possible, get your business-owner clients to sign “individually,” not just in the name of the business.
Improve your collections process with these payment options:
- Make payment automatic through autodebit of a client’s bank account. Or, if appropriate, use auto-payroll deduction. Not only will you get your money with no thought or effort on your client’s part, but you’ll also immediately know when you have a collection problem so you can get your team on it. The best part is that you can leverage technology to make this process automatic and to make the accounting easier. You may even find you can reduce your staff costs at the same time.
- If appropriate, accept credit cards. Yes you’ll have to factor in the 1.5 percent to 3.5 percent transaction fees your merchant-account bank will charge you. And yes a percentage of your clients will dispute the charges. But the bottom line in most cases is that you’ll raise your cash collected by at least 50 percent.
- Let them finance the purchase. Sometimes you can create an additional profit center by doing so.
- Break the sale down into two or more payments. For example, you could collect half up-front and half upon completion of the project. Or you could let them pay one third when they sign the contract, one third when work begins, and a final third when the work is complete. If your company’s current policy is to collect payment after work is complete, this simple idea will increase your cash flow and lower your collection costs right away. And businesses that already collect payment up-front may find that by adding payment plans they increase their sales so much that the net effect is a boost in profitability.
- If you do offer a payment plan, make sure to incentivize your client to pay in full. This can be through a discount, an extra bonus, or some other added value they get for paying in full at the time of purchase. I suggest you price your payment plan option high enough to make it easier for you to offer an attractive discount for payment in full.
David Finkel is the best-selling author of more than 40 books and courses, including The Maui Millionaires for Business. He is a successful business owner who has bought, built, and sold several multimillion companies over the past 10 years. To learn more about his tools for business owners, visit him on the Web at Maui Millionaires.