Although a business is profitable and seems to be thriving, business owners will sometimes find that their cash flow doesn’t seem to match the increase in sales. There are many causes of poor cash flow, including excess stock, overtrading, seasonal demand, pricing, and more. But the problem of poor cash flow can sometimes stem from several simple factors that may not always be obvious to business owners. These include:
- Excessive leniency when giving customers credit
- Late payment
- Slow and inefficient collection.
Collecting payments is absolutely necessary as your business’ success and continuity hinge on your cash flow. Delayed payments or nonpayment can also present additional problems for your company. Invoices that have not been paid for many months mean you need to borrow to keep your business afloat. Without the money, you’ll be forced to dip into your much-needed capital. It can also complicate your bookkeeping. Debts tied up to your business can also affect its credit rating and can make future borrowing more difficult.
Many businesses find payment collection a tedious, difficult, and often expensive process. Collecting payment and following up with customers or clients sometimes can cost even more than the actual payment owed to the company itself. The process has become so time-consuming and stressful that some companies now choose to have independent debt collection agencies chase the customers for them.
So what can business owners do to avoid business engagement with bad clients, and what should they do once the account becomes delinquent?
- Assess the credit-worthiness of your prospective customers by conducting a thorough credit check. You can prevent many collection issues at the outset by conducting a diligent business credit check or if you can afford it, a credit report from a commercial credit rating provider (Equifax, Veda, Experian, Dunn & Bradstreet, etc.). It is best to require upfront payment for customers with poor credit scores and extend credit to customers who have a high credit score. If you can’t afford to obtain credit reports from commercial credit rating providers on each and every customer that comes your way, then you can run a credit check on your own. You can check factors such as the company’s structure, its owners, the number of years the business has been operating, its track record, etc.
- Safeguard your cash flow by planning a clear and comprehensive payment policy with your customer before the actual work begins. Work out a payment schedule with your customer at the outset if you agree to allow them to pay in installments. Set a deadline for final payment when the job is completed. This can be documented through a contract or a letter.
- If you are sure that you can deliver, it is best that you require a full upfront payment from customers or clients. Dentists and doctors do not have an issue with collecting upfront payments as this has always been their policy. But for some businesses, a little flexibility can go a long way. If an upfront payment is impossible, require, at the very least, a deposit or for customers to pay in installments during the course of the project. There will be instances when you will lose some clients or customers when you demand full payment at the beginning of the project, but it’s better to cut ties now than waste money, time, and effort chasing clients who will later prove to be delinquent.
Don’t wait until the end of the month to send invoices out to clients or customers. Email the invoices as soon as you have turned over the merchandise or rendered the service to prevent any cash flow issues. Impose a surcharge on late payments, and if you can, reward prompt payers with a discount or a gift.
- When following up with clients or customers, send a courteous yet assertive reminder that an invoice is already past due. You can do this by calling or sending an email to the person in charge. Make sure that you reach the right person in the correct department. If you choose to send an email, make it as detailed yet as polite as possible. Although some of these details are already included in the invoice, you can also add specifics, such as a description of products or services, details of the agreement, and the completion date, in the email. Follow-ups, though necessary, are often met with varying degrees of success which can be frustrating. You will sometimes reach the wrong person in the wrong department. In the event that you reach the right person, you’ll sometimes be given a well-practiced spiel assuring you that they will pay as soon as possible so they can get you off their back quickly. You end up waiting for the payment for many weeks, and the whole vicious cycle continues.
- If all else fails, get a debt collection agency to collect payment on behalf of your company. There will be instances when a customer will not be able to meet its financial responsibility to your company on time. If this happens and if you feel that you have waited too long for the payment to arrive, then it’s time to have a good and reliable debt collection agency to work with you. Be forewarned, however, that not all debt collection agencies are created equal. Look for referrals and testimonies from satisfied clients before you engage the agency’s services. If you’re satisfied with the feedbacks, do a trial run by turning over a couple of delinquent accounts to the company. Check their fees, as well as their strategies when communicating with your delinquent customers. Steer clear of agencies that are overly aggressive and whose agents employ harassment, threats, and slander when communicating with your customers as these methods can easily backfire on your company.
If you are tired of calling and sending multiple emails to your customers who have not paid invoices for many months, let JMA Credit Control help you. JMA Credit Control is Melbourne’s leading debt collection and recovery agency. Apart from Melbourne, we also serve New South Wales, Queensland, and Victoria. Contact us at 1300 588 728 for a free no-obligation consultation.