Cash flow is the lifeblood of any business, especially small businesses that might not have much cash in the bank to start with. Badly managed cash flow can leave the business struggling in many areas, and can even lead to eventual bankruptcy.
Most small businesses fail because they run out of cash thanks to slow-paying customers. Late payments can lead to a vicious cycle for small businesses.
Without proper cash flow SOPs your customers will never be encouraged to pay you on time. After all, if you don’t take the matter seriously why should they?
Prepare Yourself and Set Expectations
Every industry is different, with its own set of rules when it comes to payments. Some industries have faster paying clients, while in some industries payments can take a long time simply because of the procedures in clearing the payments.
So early on in your business journey, set expectations on when you can get paid. Of course it would be ideal to get paid as soon as you send the invoice, but that’s not going to happen.
Preparing yourself in advance will allow you to balance cash flows against the time it takes for your payments to be cleared.
Be sure to communicate to your clients on when you would like to get paid as well. Before signing off on a project, communicate your payment terms and conditions to make sure both you and the client are on the same page when it comes to payments.
Automation
Many small businesses fall into the trap of lazy, slow invoicing in case there are no dedicated accounting resources available.
Slow invoices lead to late payment since the clients simply aren’t getting their invoices on time, so they might forget about the work or services you delivered.
Invoicing also tends to be a tedious process if done via traditional tools such as Microsoft Excel or Google Sheets. No one really enjoys creating an invoice.
That’s where accounting automation software comes in. Using online tools like Freshbooks.com can greatly improve the efficiency of your accounting processes.
These tools can automate a great portion of your finances and every small business should have them.
Be Flexible On Payments
Being flexible on payments does not mean you give your clients a year to pay you. Rather, it means you should give them several options through which they can pay you.
Most modern businesses accept payments through a variety of ways – PayPal, ApplePay, Payoneer and so on. Online payment methods are great because they reduce the number of steps it takes to make a payment. They’re also faster than payment by cheque or bank draft.
In your invoices, provide the details of different payments you offer. If you prefer to be paid by cheque, make sure to list the correct address they should mail the cheque to.
Penalize Late Payments
Before kicking off a project, decide with your client what the terms for late payments are going to be. You have every right to penalize late payments.
One way of penalizing late payments would be to add a certain amount of interest. Or there can be a flat late payment fee – this is up to you to decide, with input from the client as well of course.
Reward Timely Payments
Incentivize timely payments by your clients. There are lots of ways to do this depending on your business.
The simplest of which is to offer a small discount on their next order. If it’s a services business, you could offer a month’s worth of a value-added service they currently do not have.
Giving incentive to clients for fast payments works the same way as penalizing late payments. With reason to make fast payments, your clients will be more inclined to actually respect due dates mentioned on the invoice.
Send Payment Reminders
There’s no harm in sending friendly payment reminders to clients once due dates for the payment are approaching and they still haven’t made the payment.
You don’t have to be aggressive in doing this. Simply send an email saying it’s a friendly reminder that the payment for completed/delivered services/products is still pending.
It could simply be the case that your client has forgotten about your invoice, without intentionally delaying the payment.
With a good accounting software suite like Freshbooks, you don’t have to worry about sending reminders leading up to the due date in case of non-payment. The software will handle all of this for you.
Break Down Large Payments into Instalments
Some clients might be making late payments because you’re sending them invoices for large amounts which take a lot of time to be cleared by accounting red tape.
To combat this, instead of sending an invoice after six months for example, start sending smaller invoices after every 15 days. Smaller payments are easier to track and clear, so your client might just start making timely payments.
This will also ensure a steady cash inflow to your business, as you won’t have to wait 6 months to send the invoice.
Check Your Books Every Week
This tip will help business owners keep a sharp eye on their business’s finances. Simply taking 30 minutes every week and looking at the business’s books will reveal a lot.
Firstly, it will show any pending payment issues so the business owner can start contacting clients who’re not making payments, before it’s too late.
Clients who consistently miss or make late payments can be identified through this method quickly, and the owner can start negotiating payment terms with them that make it easier for them to make payments on time.
Secondly, this will also allow the business owner to assess the current financial situation. Are revenue projections being met? Is there too much spending?
Disaster can be averted if business owners simply take some time and look at the financial situation every week.
