Maintaining strong cash flow is a crucial part of running any business. You need to work with your account to ensure you have a strong cash flow to meet your payroll and other expenses, invest in new capital to grow your business and provide for you and your family. Unfortunately, it often takes a while to collect on your accounts receivable, which can seriously disrupt your cash flow.
Tips to Shorten Your A/R Cycles
Delinquent payments are a fact of life. In some industries, you also have to wait a while to collect from your customers. Fortunately, there are usually some things you can do to reduce your payment cycles. Here are some tips to consider.
Offer Incentives to Customers for Early Payment
You may collect on a net/60 period. In other words, you expect customers to pay the invoice in full within 60 days of receipt. You may set these terms, because you understand that customers need time to make payment, so reducing the turnover period may not be a reasonable option.
Rather than having your accountant change the terms on future invoices to net/30, you could offer a small discount (perhaps 3%) for clients that pay within 30 days instead of 60. Companies like Facebook can afford to wait longer, but this is because they have higher revenue. You also need to consider how Facebook makes money and how little overhead they have. You can’t compare yourself to them.
Charge Penalties for Late Payments
If customers are routinely late paying your bills, you may want to start charging late payment penalties. Keep in mind that you may not be able to do this if you have an existing contract, although you can possibly terminate the existing agreement and propose a new one with similar terms. However, the best option would be to grandfather the more lenient terms for existing customers and change the requirements for new ones.
Talk to your accountant to understand the cost of late payments. Outsourced accounting services will help you decide what a fair penalty will be to cover them.
Discreetly Suggest that You Provide Perks to Loyal Customers
You may want to offer some of your top paying customers some perks at the end of the year, such as a trip to Bahamas. You could send the trip to all of your highest paying customers, including the ones that are a bit more sluggish about paying their bills, even if they aren’t technically late (customers that wait until the last day possible can be a pain). You could send a very positive message that discreetly reinforces your desire to have your bills paid on time. It could say:
“Thank you for the great partnership over the past year! We have all come a long way and we appreciate the mutual value we bring to each other’s businesses. As a token of our appreciation, we would like to extend this all-expenses paid trip. We aren’t giving it to all of our customers, just the ones that are courteous, provide strong value and responsible about making timely payments. As you surely understand, sour business partnerships can put a strain on any business, so it is always rewarding to work with great companies such as (Client Company Name).”
A message like this will reinforce the importance of a great business relationship, which includes timely payments. Customers probably won’t feel like you are calling them out for delinquent payments, but will get the message anyways. They will be more likely to pay early if they realize how much you value it.
Talk to Your Accountant to Shorten Your A/R Turnover
Getting paid late can cause all kinds of problems for your business. Fortunately, there are a lot of ways that you can resolve it. It is a good idea to talk to your accountant and billing department to see what steps you can take to get paid more quickly to improve your cash flow.