16 Mar 2013

Collecting your money – 5 Steps that can help cash flow

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As a small business owner, collecting the money you are owed can be critical. In trying financial times like these, every dollar is important to maintaining your own credit and staying profitable. Because other businesses are also experiencing cash flow problems in this economy, many are managing by taking longer to pay their bills while they wait for their own income.

The consequences of even a few customers not paying can be dramatic for small business owners. You can take several steps at the beginning of a relationship with the customer that will increase the odds of being paid. Here are 5 steps that can help.

Step 1
At the beginning of any relationship with a new customer, you have the best opportunity to protect yourself. Before you offer any customer credit, it is a good idea to get a credit report done. If the customer will not consent (in writing, by the way) to your doing this then we suggest you make them a cash basis customer. While there may be some expense to you to get a report it is likely to be cheaper than extending credit that you never are paid back. If they balk or refuse – “cash only” is the only way to go.

Step 2
Make sure your forms provide protection for you in the event of nonpayment. Before you send out your first invoice you should have a completely filled out vendor form that provides you with details about the customer and most important – financial information including where they bank. A continuing personal guaranty for any corporate debt should be required as well. Your form should also make provisions for late charges and my favorite – attorney’s fees.

Step 3
Make a decision about when you will drop a customer if they are not paying. You should be tracking how many days late payments are. Your QuickBooks can age your receivables for you. When clients get to 30 days, contact them and talk about what is going on. If you think that the delay in paying is a temporary condition you probably want to continue to work with the customer, but keep them on a short leash. If you are sensing that the customer might be in a serious financial problem you have to consider making the difficult decision to cut them off. Communication is obviously important. When you make decisions about allowing the customer more time to pay, keep in mind that this decision will affect your profit margin not just your cash flow.

Step 4
“The check is in the mail” is a cliche that we all know to be meaningless. When confronted with this meet it head-on with an offer to accept a credit card payment or PayPal. You may also consider telling the client that you will send someone to pick up the check or cash.

Step 5
When in doubt…discount. While no one likes to reward clients for not paying, but sometimes having fewer dollars in your hand now is better than not being paid at all. Don’t be afraid to give a deep discount if your client is having problems. Giving up ten percent is a lot less than you will give up to a collection agent or law firm.

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