Cash flow has been in the news a lot lately. Xero published small business insights and highlighted that small businesses are paid on average after 41 days with larger companies (FTSE 250) taking 46 days AND most business run in the red.
In the UK at least there is legislation to, in theory, force people to pay you within 30 days but outside of that, and especially when you are dealing with larger companies the legislation is as much use as a chocolate tea pot.
In my experience, smaller companies generally don’t pay their invoices on time because they forget; are trying to manage cash flow or don’t have the cash. Larger companies generally do it just because they can get away with it and, often, payment coincides with their payment runs rather than your payment dates.
There is nothing more destructive to a business relationship than moving quickly to enforcement letters and lawyers to get money so, what can you do to improve your chances of getting paid?
#1. Reduce your payment terms.
Standard business terms are 30 days. However, your terms can request payment at any time; upon receipt (i.e. immediately), 7 days, 14 days etc. Some companies (mainly larger ones from my experience) will ignore any payment terms but many will respect your terms or, most importantly, begin a conversation about payment terms.
Importantly, beginning a conversation helps to build a strong relationship with your customer (or procurement/accounts section) and sets an expectation – both of which can affect when your payment is scheduled. Ultimately – this will help you to more accurately predict when payment will be made.
Lastly on this point, if you know a customer never pays you until 45 days, there is little point expecting payment after 30 days every month and repeating the same cycle month after month. YES – I know they should pay you after 30 days but sometimes accepting the longer payment term is a more pragmatic move. It can also help to keep you sane.
#2. Remind people before payment is due.
The number of business owners who wait to chase until after payment is due never ceases to amaze me. If you have started to establish a relationship through conversation and setting expectation (using #1), the next step is to remind people before payment is due. If you automate invoicing then many tools will automatically send reminder emails, however, actually making a call reminding your customer that payment is due and establishing that the payment will be made can be more productive. If it won’t be paid, you can at least ask when it will be?
#3. Invoice more money – less frequently.
#1 and #2 can work for everyone; this last one is a little more dependent upon your type of business but with a little thought you should be able to find a way of basically asking for more money less frequently. In some cases, you can remove the need for #1 and #2 by being paid in full before you deliver anything. Invoicing more, less frequently improves your cash and reduces administration effort.
For example, one business I have worked with ran workshops and classes and asked customers for deposits before subsequently asking for full payment prior to the class. We changed their approach and asked for full payment up front. This simple change had no impact on the number of bookings; improved their cash flow and reduced the effort required to administer courses.
If you work with larger organisations you may find they are happier to pay more money up-front. There are several ways to achieve this; re-positioning ‘services’ as products can help to change the customers’ mindset from one of paying after delivery ( service ) to one of being paid before delivery ( product ). If you can switch to a product mindset, it’s possible to switch to full payment up front sometimes a year in advance.
That’s it. 3 ways to help you get paid more quickly.
I hope you’ve found something here that will help. Simple they may be but small improvements across your business can improve business efficiency, cash flow and perhaps most importantly reduce those sleepless nights.
Let me know if these work for you in the comments below, or email me at firstname.lastname@example.org or on twitter @ikooloo_com.