Cash is the life blood of any small business.
So one of the keys to a successful business is proper cash management, by delaying payment as long as possible and collecting payments as soon as possible.
It’s usually easier for an owner to delay payments then to collect, so in this post we’ll discuss the latter.
When you sell your products and services you can collect payments two ways; upfront or bill your customers and collect later. It’s to your benefit to collect upfront and to the customer’s benefit to pay later. So, how do you decide which to do?
PREVENTING THE WORST CASE SCENARIO
Obviously, the worst case is you never get paid and you’ve already given the customer their product or fully performed the service for them. Other cases are the customer pays months later, partially pays, pays after you sue them, or pays and then posts all over social media about how awful you are.
Listed below are many of the time-tested techniques for getting paid and getting paid quickly. Whichever methods you employ, write them down so you have a standard collection process that you can easily send a customer or include on your invoices or statements.
11 Ways to Improve Collections
Bill month to month (great for recurring services)
If your customer has a monthly service, or you send them a product on a routine basis, set them up with recurring payments. Most credit card providers allow you to set up recurring payments for the same amount and same time of the month, so that you don’t have to bill the customer and collect; it’s done for you.
Require a Deposit
Require your customer pay a portion of their total bill up front. This way even if they decide not to pay the remaining portion, you are not out the whole amount.
COD – Pay Full Amount Up Front
Even better than a deposit, have the customer pay the whole amount up front. You won’t be able to recognize the revenue until you’ve provided the service or product, but you’ve eliminated the collection process.
Customer Pays Your Costs Up Front
A variation of the deposit is to have the customer pay your cost of the product or service up front. You won’t make any money if they refuse to pay the remainder, but you haven’t lost anything either.
Establish a Cancellation or Refund Policy
Develop your own, or copy someone else’s policy and paste it on your invoices, statements, contracts…
Create Payment Terms
If you don’t have payment terms, customers will assume just about anything. I wouldn’t go any longer than 30 days. Give them a small discount (like 1% or 2%) if they pay within 10 days. Indicate the invoice due date and payment term right on the invoice and statements. Communicate this to your customers before they purchase.
Write a Collection Process
Start with what happens if they were given 30 days to pay and now it’s 45 days since the invoice date. What happens? Do you call them, cut off their credit, send a letter, call your lawyer…? Have a process for 45 days, 60 days, 90 days…up to 180 days. Write it down so you don’t forget it. Regularly review your customer accounts and age them into these same buckets to make your process easier. After the balance is over 180 days old, consider either sending the amount to a collection agency or writing it off to bad debt expense.
Charge Interest or Late Fees
Charging your customer if they pay late, either with a late fee or interest can be a good way to entice them to pay on time. It is also a good negotiating tactic, as you can choose to waive these if they pay.
Making Paying Easy
Most people, and many businesses, pay their bills online now. Giving your customers the option to do this can make it easier to pay the invoice, and therefore they will be more apt to pay you. Quickbooks has the ability to add a “pay” button on the invoice that you can email your customers allowing them to pay the invoice right from the invoice itself.
Show You Care
Show you care by listening and solving issues – Many times a customer is not paying you because they have an issue with the product or service. Call them and discuss any issues they have. By showing you care to resolve their issues, you may help with them being willing to pay (or partially pay) knowing you will make it right.
Credit Checks/References
Do some due diligence up front on your customers by doing a credit check or a credit reference. This is great if your customers want terms and their purchases are large. Knowing they have paid well in the past, suggest that they will pay well in the future.
SUMMARY
A business needs cash to survive. It doesn’t do any good to generate a sale only to have it go unpaid.
The tips above are proven strategies that assist a business in getting paid on time for their products and services.
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