Our cars run on petrol. Our bodies run on oxygen. Our businesses run on cash flow.
You can bridge cash flow gaps with smart financing, but that’s a reactive approach. This article is about making sure you never need to think about bridge financing in the first place. It’s about how to run your business better. The most common, and avoidable, reason that businesses starve without cash is simply because their customers are not paying them. In a slow economy, this becomes an even bigger problem and is a huge challenge faced by entrepreneurs.
Here are three critical areas you need to address to manage your debt better, and some actionable items to implement right now.
1. Create a payment rulebook
If you want your clients to play by the rules, and to be able to deal with rule-breakers, you first need to decide what those rules are. No, it doesn’t need to be a 300-page document, just draw up the criteria that suit your business best. By doing this, and sticking to them, you can actually create good clients, and everybody wins.
Here are the important things you (yes, you) need to decide:
Will I sell on credit?
If you can avoid credit altogether, and have a 100% cash on delivery business, then that is definitely the way to go. If you’ll lose out on business by not offering any credit whatsoever, only then does credit become an option. This seems really obvious, but many SMEs just assume that they have to operate on buy-now/pay-later. They do not.
When will someone qualify for credit?
Giving credit is all about managing risk. It’s a horrible idea to extend credit to everyone, so who will qualify for yours? Will you do formal credit assessments by checking their credit score, or calling references? The more careful you are with credit now, the less likely you are to end up in a fight later. Rather lose the client than lose the work, the money and then the client. (A suggestion: Make all new customers strictly COD for three months, after which they can get credit.)
How long will I allow customers to pay?
What is your limit. 30 days? 60 days? You need to consider if you can cover monthly expenses, buy stock and pay staff while you wait for invoices to be paid, or if late payment will hinder your ability to do more work for different clients. This will help you work out how flexible you can (literally) afford to be. Also, make sure this is clearly communicated to your clients, please.
Will I ask for a deposit?
A deposit can minimise your exposure drastically, because you are never going to lose everything in the case of a bad payer. Most businesses don’t mind paying a deposit and it’s fairly standard practice these days to insist on one prior to commencement of work.
This is a good policy to have in place for brand new customers or those with a bad credit history. Actually, it’s just a good policy.
What payment method(s) will I accept?
If you’re a retainer or service business, getting customers to sign debit orders will drastically improve your collection process. It’s automated! But if customers aren’t willing to sign debit orders, ensure that you support as many payment options as possible (like EFT, Credit Card, Zapper or GeoPayments) — the more choices they have, the higher your chances are.
Once you know the answers to these, write them down, print them out and make sure your entire business sticks to them at all times. ALL times.
2. Paperwork and systems
Systems create efficiency
Efficiency gets you paid. Below are a few basic, but critically important aspects to consider putting in place, if you haven’t already. If done correctly they should feel more like a lifeline than a noose, holding your business up, rather than holding it back. In my experience most businesses will implement these reactively, as a way of ‘not getting burned like that again!’. But, I ask, why wait?
On the ‘same page’
Will you have a simple agreement, clearly setting out the terms for your engagement, that you get signed before taking on a new client? Or are you happy to rely on emails, orders or even WhatsApps for every order? Whatever you decide, make sure it’s enough to protect you if things turn sour. You can’t prove a telephone conversation, in which you agreed terms, in court… The additional benefit of a more formal agreement is that it creates (in black and white) a platform of mutual understanding between you and your clients, and will help avoid heaps of grey-area issues down the line.
A system of accounting
Who owes you money? When do they owe it by? Who is late? Who is really, really late? These are questions you should be able to answer daily, and the only way to do that is to put a decent accounting system into place so you can convert invoices into cash. I recommend Cloud systems like Xero, Sage One or QuickBooks Online.
Get it signed off
If you can get your customers to sign a delivery note when the goods are delivered, you will have a much stronger case if they decide not to pay… This works just as well for service businesses, where the client (via their signature) agrees that all the terms of the agreement were met, and they’re happy with the end result.
Invoice efficiently, and often
If invoicing depends on you, the SME owner, then you have to make sure you have the time to do so. I would recommend putting aside 30 minutes twice a week to recon the completed work, and send out the associated invoices. In fact, why not invoice as soon as the delivery note or approval form has been initialled? Do you have something more important to do? The quicker you invoice, the faster you will get paid and the sooner your cash flow will stop being a ‘cash slow’.
The ‘delayed payment’ is often in the details, guys… If your invoices are incomplete or inaccurate, your payment will be delayed until you rectify it — especially when dealing with bigger, more fastidious clients. Take the time and ensure that your invoice complies with the minimum requirements as set out by SARS, and your client. In most cases this includes VAT number (yours and theirs), banking details, due date and business address. If you’re not sure, ask your client what they require on their invoices (they will change from business to business). Something as simple as getting these details right could shave weeks off the payment time.
The more persistent you are (within reason), the more likely you are to get paid. With today’s technology you can do this automatically, reminding your clients to pay their bill with a text message, email or alert. Heck, even a phone call a day or two before the invoice is due can ensure they don’t forget, and your due is front of mind. When payment day rolls around the supplier who is on top of their collections will probably be paid first. It would be nice if that was you.
3. And then if they don’t pay…
When customers’ accounts fall into arrears, it’s your job to do something about it. It’s also a good idea to do that something as soon as humanly possible. It’s not annoying. It’s not nagging. It’s business, and you are not their bank. It’s the fulfilment of the contract into which you and your client entered.
Until you get a specific payment date, follow up every day. Trust me, if they get annoyed with you chasing the money that they owe you, you do not want them as a client any longer, so there’s nothing to lose. When you get a resolution date, make sure you remind them via a call or an email the day before it’s due. Help them to help themselves.
And if all your attempts fail, then sometimes a little lawyer’s letter is all you’ll need to open their wallets. If you don’t, you’re letting them steal from you. If you do, you’ll thank your lucky stars for all the systems and processes you put in place.
It doesn’t matter how much money you have on paper. What matters is how much you have in the bank. It doesn’t matter who owes you, it matters who pays you. You can’t run a business on promises. Ask anyone who’s ever tried.