Ask a room full of small-business owners if they enjoy dealing with the money side of their businesses and you’ll be met with a room full of people shaking their heads no.
Dealing with the money isn’t fun, but it’s a necessary evil for staying in business. Without money coming in, you won't be in business for long.
Every business is cyclical with cash flow ups and downs. The key is to find a way to keep the cash coming in as predictably as possible. Seem impossible? Well, it's not. Luckily, there are systems and processes that make it easier to collect the cash you’ve earned so your small business can grow.
Escaping Feast or Famine
When business strategy consultant Ellen Ercolini first hung out her shingle a few years ago, her focus was on career and relationship coaching. Her clients were on monthly plans with loosely defined objectives. She never knew how many would continue from one month to the next. “I spent years being totally stressed out, wondering when my next payment would come in,” Ercolini says. Her business was on a feast or famine roller coaster.
Ercolini knew she couldn't reach her income goals using such an unpredictable business model, so she clarified her target market and developed bundled service offerings with a defined timeline, scope of services and payment plans that would meet her clients’ needs. She also developed some digital products to create a passive income stream. And it worked. Her income increased by 300 percent, and her business continues on a growth trajectory.
This type of radical business change can often bring a lot of extra work and headaches with it when it comes to collecting money, but Ercolini’s approach was to keep it easy and lean. She set up recurring payment plans through PayPal that allow the client to pay for the service in small chunks every two weeks. By the time a client begins to work with her, the fee is typically paid in full.
Her motivation for setting up bi-weekly, rather than monthly, payment plans was based on information gathered from her customers. “You have to make it easy for your clients to say yes to you,” Ercolini adds.
Slow and Steady Business Growth
From its humble beginnings in Doug Driscoll's backyard, to the business it is today with a 2,500-square-foot retail store that carries pretty much anything grill related, Just Grillin is a family-owned business on a steady growth path.
It began in 2004 when Driscoll built his own outdoor kitchen, and then expanded to designing and building outdoor living spaces for friends and family. As the business grew, Just Grillin expanded its product offerings to include everything for outdoor living spaces in addition to sauces, rubs and grilling accessories because of customer demand.
A retail business with a local and online presence, Just Grillin conducts business like any other store accepting various payment options (cash, check, money order, credit cards) at the point of sale. But the project side of the business is a bit more complicated. Most projects take four to six weeks from concept to completion. Customers are required to sign a contract agreeing to specific payment terms based on the progress of the project. Payments are collected at four major milestones—50 percent is required at project initiation, 25 percent when cabinets are installed, 15 percent when granite is completed and then the final 10 percent when the project is complete.
Along the project timeline, customers are invoiced at the designated payment points. Payment is due within five days or the work stops and the issue is turned over to an attorney for follow up. Since the project scope and payment terms are all spelled out in the client contract, Driscoll says collections haven't been a problem during his 10 years in business.
Cash, checks and credit cards are accepted for projects, but Driscoll made the decision some time ago not to finance projects for his customers. He outsources that option to a finance company that handles all the necessary steps to get the project funded for the customer.
Driscoll believes a business must manage within its means for sustainability and growth over the long term. “Be conservative," he says. "If you can’t afford to buy something, don’t buy it. Before making a purchase, look at your return on investment based on your capital and make sure it’s within your budget.”
Setting Your Business Up for Success
Michelle Dunn, author of The Guide to Getting Paid, says most businesses can avoid lengthy collections processes simply by setting up procedures before the sale is complete.
Payments should be collected as soon as possible for whatever product or service your business is selling. Giving your customers payment choices increases the likelihood you will get paid.
In a world where many people don’t carry much cash, that means accepting credit cards. Dunn says when she owned her collections agency, adding credit card payment options increased her collection success by 65 percent.
Today’s technology makes that pretty easy no matter what size business you run. Options range from accepting online payments via PayPal or a traditional merchant account to services like Square for local businesses that can process transactions via their phone.
However, if your business model requires invoicing customers, the key is to get the invoice out the door as quickly as possible. An invoice should be issued immediately after the sale (or work completion), not at some distant point in the future. Sending via email is one of the best ways to go. Using snail mail just drags out the process a bit longer.
One of the biggest mistakes many small-business owners make is only issuing invoices once a month and allowing 30 day payment terms. This means you could wait as much as 60 days to get payment for work that has been completed, which is a recipe for a cash flow disaster.
Contrary to popular belief, there’s no reason to default to a standard 30 day payment cycle, but payment arrangements must be clearly defined upfront, agreed to by the customer, and stated on the invoice. This includes any early payment discounts you offer.
If you’re thinking about offering a line of credit to your customers, you should first consider identifying credit terms and a standard credit application process.
When it comes to applications, “the simpler, the better,” Dunn says. “Short, sweet and to the point. Try to make your credit application a half page or less.”
The application should include standard information such as name, address, phone and email, along with work contact details. Of critical importance is including three references you can call to do your pre-check on the customer and a place for the customer’s signature granting you permission to check their credit. Dunn recommends a two-sheet carbon form that can be prepared by a printer or purchased at an office supply store.
Then make sure you follow through on the credit application by pulling a credit report and contacting the references the customer provided. There are various questions you can pose to the references to help you determine the level of risk you are willing to take with the customer.
Once you have determined the customer is a good risk, make sure and monitor the account closely for at least six months to ensure it stays on track. And since individual cases vary, you should also work with a professional legal and financial advisor on this aspect of your business.
Chasing the Money
What if you've done everything right and your customer has missed making that critical payment? “The sooner you take action, the more likely you are to get paid,” Dunn says.
Don’t drag your feet on late paying customers. It’s critical to stay on top of outstanding invoices so you know when a customer has become delinquent. Finance software tools like QuickBooks and Sage 50 (formerly Peachtree Accounting) can help you monitor pending payments.
Dunn recommends picking up the phone and giving them a call as soon as a payment has gone delinquent. “This step can save you so much in bad debt," she says. "It eliminates any excuses the customer might use, like saying they didn't get your invoice or there was a problem with the product. Plus, it turns you into a human, not just a business.”
One key trait of people who get behind and don’t pay their bills is avoidance. Connecting with them and building a relationship makes a huge difference. It costs your business money to chase money, so the quicker you can close out the collections process, the better.
If you can’t make the human connection, you may want to follow up with letters regarding the payment due. You can try creating your own letters, or consider using templates provided by the software program you use. You should also consider working with a professional legal or financial advisor in these situations.
It is possible to have smoother cash flow by implementing consistent payment and accounts receivable processes in your business. Taking a step back and sorting it all out proactively can save you a bunch of time and money in the long run.
What about you? Have you created a consistent practice in your business that keeps the cash flowing? Please share your thoughts in the comments below.
Read more articles and see exclusive videos in OPEN Forum’s special section on Managing Your Money.
Photos: Getty Images; Ellen Ercolini; Just Grillin