Improve Cash Flow - How To Decrease Your Receivables Period
There are only three ways to reduce the cash gap....
This week we take a look at the second area; Decreasing Your Account Receivables' Collection Period. Here we are aiming to speed up payments from your customers and get them to stop using you like a bank. I know this is of interest to you, check out these practical and easy to implement strategies.
The Cash Gap Clarified
If you still need clarification on the Concept of the Cash Gap, here's the visual aid below again and a link to the explanation article understanding cash flow from 2 weeks ago.
If you have large debtors or accounts receivable levels then this is basically your customers using you as a bank... do you look like a banker? ... but, you probably don't enforce late payment penalties like the bank or charge interest... that's free money for your customers... if you also have an over draft you're paying their interest! STOP IT, collect that money in!
Think about how you have the whole Receivables area of your business setup.... do everything in your power to; i) reduce the % of sales that go into accounts receivable to begin with, ii) reduce the terms you give, iii) prevent it becoming overdue, iv) collect it in fast once overdue.
Here's some top shelf tips to nail this area in your business once and for all...
You have three key areas and times to consider, to ensure successful Accounts Receivable Management;
- 1) Before: Setting your Terms
- 2) During: Communicating with the Client
- 3) After: Post due date Credit Control activities
Will you be able to do all of the following strategies in your business?....YES. You thought I'd say ‘no' didn't you. The fact is how YOU CHOOSE to run ‘your business' is up to you. It's not set by your competitors or your industry or your customers... if it's all doom and gloom providing a particular service, then you can choose not to provide it and provide something else that you can have more favourable outcome. Take note;
1) Create more favourable Terms:
- Reduce Credit Terms: Give 15 day terms instead of 30 days. Or 7, 14, or 21 day terms not 20th of the month following which is 20-50 days. Ok, ok, ok... yes different industries have certain set terms of trade commonly the worst is 20th of the month following, and in all likelihood if YOU CHOOSE TO WANT accounts over a certain size then yes you will need to offer the industry standard. However, what about everyone else.... don't offer the standard 20th of the month terms to everyone, even if these smaller customers only make up 10% of your total revenue if you reduced the average days in Accounts Receivable from 50 days to 0 for that 10%, that could improve your overall A/R period by 5 days. Categorise your customers and prospects and write definitions & rules of each group and the different terms;
a) Group A 20th Month FollowingRules
b) Group B 7 Day InvoiceRules
c) Group C On DeliveryRules
d) Group D In AdvanceRules
People that are not on account with you when they call your company to place an order, ask them upfront "How would you like to pay for that c/card or cheque or cash?" If it's c/card take the details over the phone at order time and charge the same day the service is completed, or product is sent.
Doing regular work with any clients? Setup a monthly in advance fixed price agreement with them. They can benefit from a lower rate and the certainty of a fixed amount each month and you can benefit from cash BEFORE you do the work. This is the future for many successful businesses, sort out a programme or package product or service and you'll have cash in the bank to make bold decisions with.
- Deposits: Many businesses take deposits for work to be done, why don't you? If you do already take deposits currently why not change the amount. I've worked with businesses from Kitchen Designers to Painters, who typically would take 25% deposits at the start of a new job/project. I asked why don't we ask for more, why not 50%? What about 60%? The reaction... "you can't do that!" why not? "well, no one else does, and the customer won't buy that"... mmmm... maybe not 60%, but everyone else in your industry has a huge cash gap, and we aren't going to accept that, let's start at 40%!
Think about it! This could increase the cash in your bank account dramatically. I've seen clients go from getting a 25% deposit of an average job of $12,000 which is $3000, to getting 55% upfront that's $6600 with no decrease in sales!
- Discount for early payment: Power and gas companies have this down pat. "Pay before the 14th and receive a 5% discount, after that date pay the full amount". Of course extra margin is built in, so you could introduce a 10% price increase in your business for the start of the next month (it's inflation city out there right now, so you need to do this to make the same profit anyway, right! Can you afford not to?), sweeten the deal and soften the impact by offering a 5% discount, or even 10% if you like because cash flow improvement is what we are after, but only if they pay by the 10th of the month, not the 20th.
- Instant Late payment Fee: Much more effective than the standard flat interest rate charge per day on accounts of late payment. As in many businesses the interest rate term for late payment may as well not be there at all. It can be a hassle to figure out, to monitor or too scary to attempt to enforce. An instant late payment fee can be much easier and has the power of being very visual on invoices or statements as an extra cost. Banks, finance companies, telecommunications companies understand this, i.e. unarranged OD fee $25, late payment fee $25. People will be way more inclined to keep to the terms to avoid penalty.
- Terms & Conditions Document: Get a standard document or better yet a tailored document from a business lawyer, to reflect your business, industry, concerns and risks. Get all clients, customers, jobs, and projects to sign and agree to before you commence work. For existing customers, get them to sign an updated document or agreement. Make as few exceptions as possible... only payment in advance is likely to not need this, even then have a terms and conditions document clearly displayed at your place of work and website.
- Collection Costs Clause: Unfortunately every now and again most businesses will have a customer which can't or refuses to pay, and the costs to enforce collection through a 3rd party can be prohibitive and question whether it is even worth the cost and risk and hassle to collect... giving business owners the hard choice of writing off the invoice/s as bad debt. With a collection cost clause making the client liable for any and all collection costs you can be save to purse in many cases.
- Factoring vs Overdraft: For a growing business they need a growing working capital amount. Perhaps you started with a $50,000 overdraft and that has been long since spent and now you are growing strongly and starting to make good profits but you never see any of the cash and you are finding you are short of cash... well the business probably needs more capital investment. For some B2B businesses factoring can be a better alternative than an increase in the overdraft. You'll probably be best to have $1m + in revenue and have 60% or more business account customers to be attractive to the factoring companies. It can mean 90% cash on invoice to your business, so definitely worth investigating.
- New Accounts: Do a credit check with Dun & Bradstreet or Baycorp or whoever or ask for non related party references.
2) Keeping the Communication Immediate & Frequent
- Invoicing: Do it immediately, don't wait until the 3rd of each month to send the invoices all in one go for the last month. Change your internal processes if you find this difficult. Don't be a dinosaur, doing business requires improvements or you'll suffer the consequences, no cash! Invoicing is a priority, if you've done the work get payment for it! With accounting packages you can set them up to print automatically once an invoice is created for daily posting/faxing or even send an eMail automatically saving; hours of administration, money in postage, trees in paper, and the customer gets the invoice faster than any other method! Don't have the eMail address... ask for it!
- The Invoice: Don't have the words or category boxes "Current, 30 days, 60 days, 90 days+" on the page, it screams "it's ok to pay us 90 days+, other people do, look we'll even keep you informed and update each month on your journey from current to 90days+ by displaying that progress in the next box". An account is either Current or Overdue, that's it! Additional to this you can have colour stamps or hand write or use a highlighter to bring stand out attention to the due date.
Monthly or Weekly Statements: Send statements separately than invoices with an included copy of your terms and conditions. You could always send weekly if you have many invoices, and make it persuasive for the client by sending any statements with overdue amounts on light red coloured paper to express urgency.
- Email; use the "High Importance red "!" to flag the eMail.
- Post; use "urgent & confidential" stamps on envelopes.
- Fax; use covering letter or fax header sheet highlighting due date and terms.
3) Implement A Credit Control System
1. Flowchart the Process: This has got to be one of your best strategies. Create a step by step flowchart of what happens when an account or invoice is not received by the due date. i.e. Day 1 eMail, Day 2 Phone Call, Day 3 Fax Letter, Day 4 Ph Call, Day 5 Post Letter ...etc... At each step of the way you should have a standard script for calls, template for letters, faxes and eMails...and a clear desired outcome from each step. Do this from Day 1 through to Day 30, then it should be referred to a 3rd party Debt Collector.
With a clear process you will start the communication early not wait until the 1st of the month to start collecting 20th of the month accounts, HELLO... that is 10 days overdue before you even start doing anything!!
2. Follow the System: There's no point having one if you don't use it.
3. Make Arrangements: It is much better to get a client early on making a regular weekly commitment to paying an overdue account off than to wait until they pay the amount in one hit... that day may never come or it might take three times as long.
4. Outsourcing: Hey, I understand collecting debt is not too fun. So why not outsource it to a professional. The major benefit here is that you and your team are left to focus on the really important things like marketing and sales and making strategic decisions to move the business forward, and you don't get bogged down, lose focus, become bitter and twisted with the world by a warped perception of people, customers, business and your opportunities.
Add to that, if you're kind of avoiding the area of collections right until it's so painful that you have to do something about it, then having a professional to do this for you will likely start to save you in interest charges with the extra funds in the bank.
5. Debt Collection: Credit Control is not Debt Collection. Debt collection is the next step from credit control, it is what happens once you or your outsource credit control company fail to get paid by your businesses pre-determined number of overdue days. Some businesses it is as short as 30 days, some 60 days others just don't have it. I'd recommend between 30 days no contribution toward the account.
This week's Action Points...
This area doesn't take a rocket scientist to figure out. What it does require; a little organisation and commitment. Make the rules, then follow the rules.