- Be clear on payment terms
- Keep communicating with your customers
- Spread out payment and use credit card facilities to help with cash flow
Focus on sales and debt management for good cash flow
Managing debtors is a serious concern for Australian businesses. Amongst current businesses, the average gap between date of invoice and date of payment is 53 days. There's an even greater gap between production costs and date of payment.
Business owners often ignore cash flow issues such as credit risk and receivables management, focusing instead on revenue and sales numbers, which don't provide the necessary cash to operate the business.
Cash flow boot camp checklist
Make payment terms clear from the start
'Setting very clear guidelines for clients, both verbal and contractual is fundamental,' says Trent Leyshan, Managing director of Boom Sales consultancy.
'Often business people ignore vital warning signs because they are too eager to get pen on paper. Be wary of clients who go way outside their initial budget, as it much easier to agree to a deal than honor it.'
Find a great accountant
To maintain cash flow, hire or at least sub-contract an experienced accountant who can pick up the phone, talk openly with a client in a polite, professional manner, and get the bill paid.
The accountant should also watch cash flow figures closely and ensure debts don't build up.
'Have them monitor cash flow daily by invoice not statement, and ensure supply agreements enable me to claim from the owner of the business personally - not just the business,' says Lou McLeish, senior account director at debt collection agency eCollect.
Chase early, not later
Try to avoid debts occurring in the first place. Ensure payment terms are clearly outlined and signed off at the start of the working relationship.
Tom Griffith, co-founder of Emma & Tom's, recommends setting clear payment terms of seven to 14 days, staying in close contact with customers and collecting payment with new deliveries whenever possible.
Communicate, communicate, communicate
Business owners should feel comfortable about talking to clients about fees. Being upfront, open and transparent is key to avoiding cash flow issues.
It's important to get the basics right - issue correct invoices on time, follow up on invoices, and be prepared to take action against delinquent payers. Another fundamental way to avoid payment problems is being transparent about all service costs to ensure customers don't get any 'surprise' bills.
Hedge your bets
Smaller businesses that have clients with long payment terms should make sure that they have a mix of other customers that will pay on much shorter terms. Larger clients often hold up payments, so it's best to have a mixture of clients on different terms and build an annuity revenue model into cash flow.
Spread out payments
Rather than insisting on payment upfront, businesses should work out how to spread payments over a reasonable time span, ensuring regular cash flow. Customers appreciate spread out payments, and are less likely to default on payment mid-project if terms are more manageable.
Take further action
If customers fail to make payments, businesses should engage debt collection agencies to negotiate and collect payment on their behalf. This will reduce business owners’ stress levels and ensure they receive what they are owed.
This edited article by Emily Ross is reprinted with permission from SmartCompany.com.au.