With most businesses that have a product or service which is paid for monthly, the revenues are in the form of recurring fixed monthly charges payable on a particular day of the month. These are similar to your monthly telephone line rentals. The amounts involved and the due date are written into clients service contracts and therefore both the timing and invoice value are fixed. Large clients can often delay payment of the fixed recurring charges beyond an invoice due date meaning that cash flow could become sporadic and disjointed.
How do you manage cash flow”
1. Adjust invoice timings
Move the date you send invoices to the start of the month (such as 30 days) instead of 14 days before the due date. Many small businesses only have one or two BACs payments per month which are not automated so they can easily be forgotten. Sending invoices a month in advance gives the client the opportunity to include you in an invoice payment run before the due date.
2. Change payment options
Look at what payment methods you offer. Cheques can be sent for the due date of the invoice, but then take three to five working days to clear, plus theres more administration and possible delay in paying them in. Offering BACs or card payment as the only options you will allow your clients to make quick electronic transfers. If you are a more established business, then consider introducing mandatory payments by direct debit or a standing order option.
3. Weekly review
Once a week it is good practice to review all accounts and your cash flow. If your business is big enough to have account managers and a finance department, these two areas need to work closely together to ensure any reasons for non-payment are uncovered and action plans put in place to manage the client relationship effectively.
4. Get on top of overdue bills
When an invoice is overdue there should be a set process in place to tackle it. The use of telephone calls and letters are often less threatening than electronic communication alone. Offer to talk to your client and try to understand why they are finding it hard to pay invoices on time and dispel the awkwardness of an overdue invoice. You need to be clear about what and when they will pay. Consider asking them to pay further in advance (e.g. quarterly payments), or give them limited choices on payment options so that both you and the client can continue doing business together.
5. Switch off
If all else fails, dont be afraid of switching off a clients service or withholding products. Get in contact with the customer to agree when payment will be made and give them clear deadlines. If the client fails to pay within these terms, tell them that youll be suspending services or product. Youll often find you get prompt payment at this stage.
Small businesses are often reluctant to press for payment for fear of alienating clients, but if you approach it in a proactive and professional way the results can be impressive, and your business will benefit from improved cash flow. This in turn will improve relationships with all third parties and customers, as well as giving staff a morale boost to know that their employer is more secure.
David Barkeris technical director and founder of the green colocation and connectivity supplier 4D Data Centres