Running out of cash in a business can be like getting hit in the face. The cash cushion you depend on to run the day-to-day operations of your business simply doesn’t exist. Most business owners do not receive payments from their customers in advance. In other words, your accounts receivable can accumulate for days or even months. Aaron Rodriguez, an expert in implementing business plans for proper optimization, explains how a company can improve its accounts receivable system to continue to thrive in the marketplace.
Without the right amount of cash on hand, you can’t buy materials for new jobs or, worse, you may not be able to pay your employees. To prevent that from happening, you need to implement a process for paying your accounts receivable to not affect cash flow. “Customers receive services and goods from your company in exchange for payment. If they do not pay you immediately, customers incur a debt, which you must list in the accounts receivable section of your balance sheet. Once you get paid, you reflect it as revenue in your income statement,” Rodriguez explains.
This is a common practice in certain industries. For example, in digital advertising, 62% of invoices are not paid for up to 60 days or more. Contractors, architects, and engineers in the construction industry can wait up to 80 days to get paid for their work. And larger companies typically pay their suppliers in 90 to 120 days.
Imagine you are a restaurant supplier who invoices the business after you deliver the product. In that case, as a supplier, you have an account receivable. Or suppose you are a contractor who invoices your customer after you have completed a construction project. You record an account receivable as an unpaid invoice in either case, and you wait for your customers to pay.
“So that the impact of that wait time doesn’t affect you more than it should, you must optimize your company’s cash flow so that working capital is always available,” Rodriguez asserts. “Once you set up a solid debt collection system, you will be in a better position to control your finances. You need to keep several things in mind to keep your cash flow stable.”
First of all, check the credit status of your potential customers. If you intend to do business that involves long-term, expensive projects, check your customer’s credit history to verify their creditworthiness. Remember that you are not a bank. The fact that you extend credit is a privilege within your customer service.
Make it clear how long you can expect to wait for payment. For example, if your suppliers expect you to pay them in 30 days, you should not give your customers, say, 45 days to pay you. If you give your customers 15 days to pay their invoices, your cash flow will not be affected.
“It is of utmost importance to be strict with your credit policy. You should not offer all your customers credit if they are not creditworthy. Nor should you offer credit to new customers until you have established an ongoing relationship with them. Once you extend credit, be strict with those customers who don’t pay on time,” Rodriguez points out.
It’s also sometimes good to offer payment plans. Before your customers commit to buying your product or service, ask them how they prefer to pay. Some may want to make installment payments or pay by check, cash, money order, or use credit or debit cards. You may want to receive a portion of the cash upfront by requiring a 15% deposit on orders.
Keep track of payments. Designate a member of your staff to call customers, verify that they received the invoice, and remind them when to pay. If they are unable to pay on time, make a second call to ask them the reason for the delay and the new payment date. Keep complete notes in each customer’s file.
Rodriguez states, “To keep customers from relaxing on this issue, be sure to impose late fees. Don’t hesitate to force your customer to pay on time by adding a late payment fee, such as 1.5% interest or more on the outstanding balance. As a courtesy, waive this charge the first time customers are late in paying. However, make it clear that you will not cancel late payment charges again in the future if they continue to pay late.”
Also, send your invoices on a regular basis. Your customers, like you, are always busy and need reminders to pay their debts. Send invoices twice a month instead of once. By doing this, you will see an increase in on-time payments. “As a general rule, most customers don’t pay in advance and may forget to pay their bills,” Rodriguez says. “That’s why it’s important to design and implement a collection plan and manage your accounts receivable correctly as this will ensure that your business has a steady flow of cash.”
In an ideal world, your cash flow should never be tight, but unfortunately, it often is. In those situations, a business loan can also provide you with working capital so that your business has cash on hand at all times.