You can foster a profitable cash flow for your firm by starting off each production order on the right track. Implement a three-step payment plan. Negotiate terms and conditions that require payments when you want them. Profitable cash flow will occur when you establish and execute timely cashflow concepts into every order.
Consider these steps before accepting an order. You need a negotiation plan: it should be prepared and followed with the same care you use to document your production process. Time invested in obtaining favourable cashflow terms and conditions can mean added profit and higher returns on your investment. Never forget the fact that your cash flow will never get any better than what is defined in the negotiation process. Take steps to get the best available payment terms.
Step 1: Bill before delivery
There are three ways you can issue an invoice before you ship the final product:
- Milestone Billing. This is fairly common, where heavy upfront investment is required for a new product or job. In this case, the completion of a certain event or milestone (placing a sub-contract, passing a critical design review or receiving a large amount of material) is given a billing value. This authorises you to issue an invoice when the event occurs – often long before completion of the deliverable item.
- Establish Progress Billings. This is fairly common in the defence and aerospace industries. Progress billings allow you to invoice costs, as incurred, on a routine bimonthly or monthly basis. This way, your customer finances your inventory. The advantage is that while a job is in process, your investment is reduced. In effect, you recover your costs before you deliver anything. (In this case, your customer does have a lien against the inventory.)
- Utilise Sub-line Item. This is fairly common in the construction industry. This billing term recognises the times when an entire item cannot be completed, but the main elements of it are. Examples of sub-items are: the foundation, plumbing, frame and roof of a home. The advantage here is that as each major sub-element is completed, an invoice can be issued, thus speeding cash flow.
Step 2: Set payment due dates
This is important because it defines when you will be paid. Why take an order if you don’t make an effort to assure payment? Bear in mind that extending credit to customers has a real cost to you. Be sure your contract (and price) provides for that cost. Poor credit risks should be sold on a “cash on delivery” basis. Discounts can be offered but tie them to the shipment date, customer acceptance date, your invoice date or a calendar date. The point is, once the payment date is established in your contract (purchase order, etc.), you have a legally enforceable document.
Step 3: Establish penalties for late payment
This will help you get timely payments. What happens today if a customer pays you 30 days late? Do you collect interest, or are you just happy to get paid? If your terms and conditions require a penalty for late payment, you improve your chances for timely payment – and based on contract terms, you have legal remedies available to you to collect interest from delinquent accounts.
You can negotiate profitable cash flow to save collection time and effort. You must place extra emphasis on payment provisions if you want to keep the profit you earned on the production line as your own.