Poor cash flow is among the major reasons why businesses fail, they simply run out of money to keep operations going. Some of the reasons are poor credit policies, poor cash planning, as well as lack of contingency planning. As a small business you do not have the wherewithal to extend credit on account to all your customers, this privilege should be reserved for your top customers only. Many business make the mistake of automatically granting Net 30 to every single customer they have, which simply means that the customer has 30 days to pay on the balance of an invoice.
Many customers seek to do business with vendors that grant credit terms, since most of the time this is part of the customer’s cash flow management strategy. By not granting credit terms to your customers you do run the risk of losing business, this however is a fine balance that you have to find and stick to. Granting credit to all customers will increase your risk of running out of cash, while not granting credit will discourage some of your customers from engaging your services, which will impact revenue. Here are several steps that you can take to ensure your cash flow is under good management:
- Strict Credit Policy. Verify all credit references, as well as request financial statements from customers to verify their financial viability prior to granting them credit on account.
- Adopt a concerted effort in to continually analyze your accounts receivable, as well as follow with your customers on past-due invoices.
- Establish a Revolving Line of Credit with your bank to help weather instances when cash is low.
- Start by giving Net 15 terms to even your top customers, instead of Net 30.
- Offer discounts to customers who pay their invoice prior to the due date, terms such as Net 1{bcb10712eadb32c7e50a15bcbfb14ed4d7108a9fa2a5dcafffbff4bd1d9a4f28}/20 or Net 2{bcb10712eadb32c7e50a15bcbfb14ed4d7108a9fa2a5dcafffbff4bd1d9a4f28}/10. If the customer pays the invoice with in 20 days they receive a 1{bcb10712eadb32c7e50a15bcbfb14ed4d7108a9fa2a5dcafffbff4bd1d9a4f28} discount from the total of the invoice, while 2{bcb10712eadb32c7e50a15bcbfb14ed4d7108a9fa2a5dcafffbff4bd1d9a4f28} discount if they pay within 10 days.
- Charge finance charges and late fees, this will encourage the customers to pay their invoice prior to the due date, otherwise they will incur additional expenses.
The longer invoices are past due, the higher the risk of having a customer default on invoices. Start making phone calls five days prior to the due date of the invoices to verify payment status. Having a good method of delivery for all invoices is a crucial step, as this will help avoid any possibility of the invoices getting lost and not reaching the customer. Another step that you can take is to try to get the best credit terms from your vendors, preferably Net 30 or Net 45. Having longer credit terms with vendors, and issuing shorter credit terms to your customers will help ensure that your business has good cash flow.
