Issues with cash flow are some of the most common problems that businesses face. No matter the size of the business, it can be crippling to any financial situation. There are several actions you can take to alleviate these issues. Even just one of the following ideas can greatly impact your situation for the better.
Shorten Payment Terms
It is common for new business owners who are eager to start signing clients to be very generous with payment terms. But this can lead to a host of cash flow issues. Now that you have been in business longer and seen the ramifications that generous payment terms can impose on your business, it’s time to take a closer look at the amount of time you are giving your clients to pay invoices.
The amount of time you should give your clients to pay their invoices varies with the size of your company. For small business clients, you should be on shorter terms; two weeks is preferred but 20 to 30 days is the norm. For larger clients, they will often request a minimum of 45 days to pay with 60 days being the norm. If you work with large corporations or have a government client, you can expect that they may request up to 90 days. Unfortunately, with larger corporations, you’ll typically have to play by their rules, particularly because many have blanket terms across all of their vendors. For smaller and medium-sized businesses, however, you typically have the power to set the terms.
Moving forward, tell your clients that you plan to reduce the payment terms. Then, put the change order into writing and follow up to ensure that they are adhering to the shorter payment terms. This small change will help with your business cash flow issues significantly.
Give More Than One Payment Option
If you are offering your clients limited payment options this can be a challenge for them and can, therefore, pose a cash flow problem for your business. Make it easy for your clients to pay you By offering multiple payment options. For example, you can allow them to pay by check, credit card, or wire transfer.
In order to implement this new step, you should send out a letter or email your clients so that they are aware of their additional payment options.
Invoice Immediately
Businesses lose thousands of dollars every year because of delays in invoicing. One of the biggest learning curves for new businesses is invoicing on schedule. It is easy to get so busy and bogged down with work that you are sending invoices out only once a month. But, this poses an obstacle to healthy cash flow.
It is better to invoice at the time services are rendered as opposed to monthly or weekly. Let’s say you invoice on Thursdays but you do not render service for your highest paying client until Friday, forcing you to wait a week to be able to access those funds. As soon as you are able to, send out an invoice for products or services rendered, ideally the same day.
Once you implement this with all of your clients, you will notice your cash flow issues waning.
Stick to Recurring Revenue
This is one of the most effective ways to alleviate cash flow problems by essentially getting on retainer with your clients. What this means is that rather than getting paid on a project-basis or each time you sell them a product, you’ll get paid the same amount on a regular basis. You will know as you are budgeting that you can count on this income coming through. Businesses that operate in recurring revenue rarely have cash flow issues.
Stay on Top of Collections
When you notice that a client is late on paying an invoice, don’t just make a note and come back to it later. Instead, you or someone in your accounting department should contact that client and ask them to make their payment….politely. Always be polite and understanding; this will serve your business ten-fold. If you are friendly and understanding, a client will feel they can continue to be open and honest about their financial situation. When they are having difficulties, you’ll be the first to know rather than being surprised when they are unable to pay.
In addition, it is always good to have internal collection procedures and timelines to ensure the collection process is implemented on a regular basis. State your collection policies clearly to each and every client and make sure you are sticking with them. Constantly dealing with cash flow issues can pose a big threat to your business and operations. But, armed with these tips, you can keep money moving along the pipeline. If you have run into cash flow problems or other financial issues, the folks at Jones CPA Group can help.
Jones CPA Group can be your partner for all of your tax and accounting needs.
STATEMENT OF CONFIDENTIALITY:
The information contained in this electronic message (and attachments, if any) is confidential under applicable law, and is intended only for the use of the individual or entity named above. If you are not the intended recipient, you are hereby notified that any use, distribution, copying or disclosure of this communication is strictly prohibited. If you have received this communication in error, please notify Nellie M. Green, CPA, CVA immediately at Jones CPA Group, P.C. (757) 631-4760 or by return e-mail to ali@jonescpagroup.com and permanently purge the communication immediately (and attachments, if any) without making any copy or distribution.
DISCLOSURE: Any accounting, business or tax advice contained in this communication, including attachments and enclosures, is not intended or written to be used, and cannot be used, by any person for the purpose of avoiding tax penalties that may be imposed by law.
