Let’s face it: cash flow is the lifeblood that sustains any business. Small business owners oftentimes assume customers or clients will pay in a timely manner but when they don’t, we don’t want to rock the boat by asking for payment. Cash flow management is vital, but if done poorly, many businesses may be faced with closing its doors. If a business owner is solely focused on chasing the next sale and not tracking the state of current contracts, they can be blindsided by sales that may be on the books but not in the bank.
Dee Bowden is CEO of BCS Solutions, a revenue recovery company that helps businesses to untangle the money disconnects and recover lost revenue, lost time, and mitigate business decline. In the early 2000s, while working for a small IT firm outside of Boston as a collections specialist, she was assigned $8 million owed in outstanding invoices, where the sales staff sold the services, but no one followed up to collect the payments. She was successfully able to recover $6 million. Shortly thereafter, the company abruptly dissolved, which provoked her to identify possible disconnects in these four areas: sales, contracts, accounts payable, and accounts receivables. Bowden believes that these areas were operating independently instead of being properly integrated within a complete, robust sales cycle.
Bowden shares five strategies on how small business owners can protect and secure their cash flow.
1. Establish Shorter Collection Periods
There is a direct correlation between how much a business can invest in its own growth and its DSO (Days Sales Outstanding), which is crucial to its ability to stay in business and thrive against competition. In accounting terms, the DSO is the time period it takes a company to collect on invoices. If a company takes too long to collect on outstanding invoices, the cash flow is negatively impacted and businesses surviving on slow cash flow are subject to an inevitable loss. However, a short turnaround on collecting receivables means the company will be positioned to reap profits more readily and re-invest those profits in its continued growth.
2. Track Payments Carefully
Establishing short periods of time to collect receivables is just the beginning of getting paid, but it’s not enough. Neither does it ensure quick, consistent turnaround on the receivables (payments), which is why the company must proactively go after its money. Before this occurs, suggest the company safeguard against any unforeseen hiccups, for example, by making sure all invoices are accurate and sent out on time. Checking to see if the payment terms and due dates are clearly communicated. If any of the company’s contact information (e.g., billing address, phone number, point of contact, etc.) has changed since the last billing, make sure the new information is reflected in the invoices. Once you’ve flagged and guarded against potential errors on your end, begin making calls the moment invoices are sent.
3. Audit Overdue Accounts
Of course, many payments aren’t made by the requested due date. Therefore, businesses must routinely track all their accounts/contracts to ensure payment for products or services provided and to maintain a steady stream of revenue to fuel and protect the lifeline of the business. Routine audits eliminate unnecessary stress over collecting the “old and owed.” Of course, on-time paid invoices are the expectation but anticipate those times when you’ll be challenged in collecting from clients who refuse to pay, for whatever the reason. There are some practical steps you can take that may result in payment such as speaking amicably to the responsible party, reducing what is owed, breaking the payment into manageable terms or offering multiple payment methods.
4. Identify Smallest Accounts To Start Collection
Sort all of your outstanding accounts from largest to smallest. Start with the smallest amounts due and proceed to collect monies owed. The advantage of starting with the smallest amounts is that they may prove the least difficult to retrieve or negotiate. Dispensing with smaller accounts helps build momentum and confidence that the larger accounts can be successfully collected and/or negotiated as well.
5. Issue Invoices to Pay on Receipt
Structure your contracts and invoices to be paid upon delivery. Minimize or consider eliminating the use of net 30 or 60-day payment terms, which may inadvertently encourage late payments and adversely impact the company’s ability to grow financially. Once payment is made late, it’s time to bill again, and in turn, another late payment is likely to be submitted. This system of payment setup puts your business on a carousel of being paid late repeatedly. Invoice customers immediately upon completion of a service. Again, follow up quickly whenever payment is delayed. An accounts receivable report generated automatically by the accounting software or team will indicate where those money leaks are. Rely on the report and use it for call scheduling and tracking. If you (personally) do not have time to make these follow-up calls, consider contracting a service, preferably one that can take payments over the phone and on the spot!
To learn more about how to secure cash flow, check out Entrepreneurial Elevation.