The success of a business is directly proportional to its ability to finance its operations. When starting out, every business is dependent on cash flow, and many need external financing to expand their ventures. Entrepreneurs must develop methods for smooth and productive functioning to maintain sufficient cash flow. Consistency can make or break a business.
Cash flow can easily be disturbed when companies perform work on credit for their clients and those clients don’t pay on time. Most of the time, this is structured so clients can pay invoices after a month or so, during which time your company should maintain sufficient cash balances for essential operating expenditures. This reserved cash must serve your needs while waiting for payments.
However, a significant obstacle to smooth cash flow and business function is late (or incomplete) payments from clients. Overdue payments can distract you from important productive matters and even cause you to miss critical payments to your suppliers and workforce.
To ensure on time payments, it’s important to develop appropriate strategies to strengthen your invoicing and receivables management process.
Know your customers well
Customers typically approach firms to hire after going through many possible options to solve a particular problem. Likewise, businesses should also know who their customers are and filter accordingly.
You can use commercial credit reports to determine the trustworthiness of potential customers. These reports, much like personal credit scores provide general impressions of the financial strength of active businesses, with a particular focus on their payment habits. Some reports may also include details on revenue or growth rates that can help you even more. Dun & Bradstreet is the most well-known commercial credit reporting agency for U.S. businesses, but personal credit leaders Equifax and Experian also maintain detailed business credit records. However, these shouldn’t be the only factor used when deciding who to work with.
The invoices you send to your clients should be airtight! It might seem like an easy thing to accomplish, but statistics have shown that almost half of all invoices sent to customers are incorrect. Any fumble that causes your clients to become confused about their invoices can serve as a cause for late payments. Before sending invoices, double check and verify every detail. If a customer has a question about their invoice, there’s a much higher chance of late or non-payment.
Faster payment solutions
Make sure to provide your clients with effective and easy payment solutions. Even if you send a perfect invoice, it won’t guarantee speedy payment, particularly if you’re sending invoices online but asking for checks to be mailed out. The best way to ensure fast payments is to provide multiple convenient ways to pay — for example, by providing wire transfer instructions, your business’ PayPal recipient information, or even via accepting credit card payments via an online gateway such as Stripe or Square.
Stay in touch
It’s important to stay in touch with your client and know them well, not only to avoid late payments, but also to better help them with any situations that arise. Listen to your client well enough to provide them with solutions to their problems or alternatives to their roadblocks.
Conduct yourself in a reputable and professional manner, and your customers will appreciate the conduct and communicate about any prevailing circumstances that might cause delays in payment. You’d think this would be a very basic tenet of business management, but many entrepreneurs and managers fail to appreciate the importance of communicating with integrity. Make your clients aware of the available payment plans they can follow, which in turn will help you handle your finances more effectively.
When you really need the money fast
As an entrepreneur, you should be empathic and patient with your clients and give them some time to complete their payments. But when “some time” turns into “too long,” how can you ensure business continuity if bills need to be paid quickly and payment remains a ways off? One way to smooth out chunky cash flow caused by long payment cycles, particularly if you’re a product vendor, is purchase order financing. With purchase order financing, a business can “sell” its unpaid invoices to a third-party financial company, which often collects payments from your customers after providing your suppliers with the amount invoiced for the goods you’re selling to end user clients.
This is a secured funding technique that can help address serious and immediate cash flow problems by offering financing to vendor businesses so they can meet payroll expectations, pay other bills and overhead, purchase additional equipment, or handle necessary marketing costs.
A similar financing option to address unpaid invoices for completed services or delivered products is called invoice factoring. The factoring firm will provide capital and use your accounts receivable or unpaid invoices as the guarantee for the transaction. These factored invoices are funded via two types of transaction installments. The first installment is delivered as soon as the invoice is verified and your application is approved. This will be for the bulk of the unpaid invoice, at times up to 80% of the factored balance. The remaining balance will be paid out by the factoring firm after it collects any remaining debts from your customers. Invoice factoring offers immediate functioning capital to help reduce any funding gaps caused by late-paying customers. But there are also other benefits to this option. Since collections are managed by a third party, your business will have more time and resources to focus on other growth factors. The amount of funding available through invoice factoring can be substantial, and factoring terms can be customized to ensure your business’ smooth operation. Invoice factoring can also be easier to obtain if your clients are established firms, as approval for this form of financing depends more on your clients’ creditworthiness than your own. Some companies choose to use purchase order financing and invoice factoring in tandem, and other businesses may choose to factor their invoices even if their client payments aren’t overdue, particularly if the payment schedule stretches out over several months.