Are Your Customers Affecting Your Cash Flow Cycle?

Think about it for a moment; would your business incur more debt from existing or prospective customers? Sure, you may do credit checks on prospective customers but so much can change so quickly, they’re likely out of date 12 months later. So how do your existing clients affect your cash flow?

Existing client debt can include anything from unpaid invoices to out-of-sync credit terms or business clients filing for bankruptcy. Sometimes problems affecting a small business’ cash flow are an indicator of a trend in the economy. In the Kauffman Foundation’s seventh follow-up report of the Kauffman Firm Survey (KFS), the number of entrepreneurs said their biggest problem was customers paying late or not at all increased 12 per cent in just two years.

Keeping your ear to the ground is a big part of running a successful business, but it can be hard to find time to follow what’s going on. Here are tips for how to cover the basics.

  1. Track your invoices.

It can be tough to stay on top of all your business’ data. Take a look at cloud based accounting programs that remind you to follow up on outstanding invoices. Some will send a polite email to your clients when their account is overdue.

  1. Follow up quickly!

Many small businesses make the mistake of leaving it too long to chase up an unpaid invoice. Research suggests that every month counts. Don’t let a little problem become a big one; touch base as soon as you can.

  1. Offer discounts for prompt payment.

The simplest solutions can be the best. Charge your customers a little less in return for speedy payment to get money back into your business.

  1. Have a process for late payment of invoices.

Small businesses often have less clout to enforce terms of trade and ensure on time payments.  Have a checklist you can follow to keep you on the straight and narrow. Make sure your clients know what steps you will take if they don’t pay you. Entrepreneur.com suggests a five per cent late payment fee and stoppage of work.

  1. Don’t extend credit.

This is an example of having a naturally negative cash flow, something that is ultimately unsustainable. Giving your customers 30, 60 or 90 days to pay means you’re effectively giving them a loan.  When you need to pay your overheads long before your customers pay you, where are you going to get that money?

  1. Manage your payment terms with your customers.

If your supplier needs to be paid in 30 days, your customer’s invoice should be paid in no more than 20 days. Look ahead and keep payment terms in sync; it means you will always be able to pay your bills.

Cash flow problem escalates

Keeping a friendly, ongoing relationship with existing clients is just good business. Not only might you make more sales out of it, you’ll find out how your clients are faring and what their problems are. If an invoice is unpaid, a simple reason could be a clerical error. There’s no need to deem them untrustworthy after one missed deadline, but after a few you may need to consider calling a debt collection agency to follow up for you.

When businesses feel the pinch they slow down all payments. If they owe you money, your business might bear the brunt of that. If a business you deal with regularly suddenly starts to pay late, or slowly, it might be worth considering their stability.

The tendency to delay payment to ease a cash flow crunch can have a domino effect. A customer with a cash flow problem might pass it onto your business, which in turn will force you to pay your suppliers late.  This is one of the reasons it’s so important to follow up prompt payment.

Looking to the future

If you’d like to avoid a future cash flow problem, why not consider using Reep to help you get where you want to be. Contact us today to get started. You’ll be surprised at how easy it is to establish your current situation and track your cash flow.