Feeling the Crunch...
Managing Cash Shortages

• "My business is always short on cash. Any ideas?"
  - Always Broke

  Small businesses frequently feel the crunch of cash flow shortages. The constant struggle to pay the bills can become discouraging. One way to relieve that constant pressure is through better management of company receivables.

  Set your policies

  Before you make a sale, you need to set your billing policies or your customers will set them for you (and they won't be in your favor!) If your product or service goes out the door without payment, you are essentially lending money to that customer. Are they worthy of your credit? Prevent problems by asking for credit references. Then, take the time to call those references. Are they listed in Dun & Bradstreet? Ask why they left their last vendor (perhaps they have a string of unpaid vendors ahead of you?) Be cautious and firm and follow your gut instincts about a potential customer. More than likely, your instincts are right on the mark. Trust them.

  Time your invoices

  Make it a policy to never let a job or product leave your business without an invoice. It may seem like an inconvenience, but your collection rate will improve dramatically. There are several reasons for this. First, it is easier for a customer to relate the value of your product to the price you have charged. As time goes by, that warm, fuzzy feeling wears off and a customer may not be as eager to pay as they initially were. Second, if your customer receives your invoice weeks after they have received your product, they may feel that there is no reason to pay quickly. In their minds, if you can afford to wait to bill them for weeks, you can also afford to wait several more weeks for them to pay. Finally, staying on top of billing evens out your cash flow. Instead of billing once a month (or when you are desperate for cash) and waiting another month to get the money, you will have money coming in on a steady basis.

  Consider a retainer, a deposit, or COD

  If a customer has proven to be a poor payer, ask for a retainer. Do not be embarrassed. (They were not embarrassed about owing you money all the time. Why should you be now?) You can simply say, "Based upon your past credit history with us, we will need X amount in advance and the remainder when the job is completed." Or, type up a payment agreement, have them sign it, and then give them a copy. It is harder for someone to put off paying when they have a signed agreement in their hands.

  Offer discounts

  You may want to offer discounts for invoices paid within a certain time frame. One common offer is a 2 percent discount if an invoice is paid within 10 days.

  The squeaky wheel ...

  Follow up immediately on unpaid invoices. Your customers will quickly size you up as to whether or not you are someone who expects to get paid . When prioritizing their payment schedule, your customers are more likely to put you at the head of the list if you have a reputation for following up on a regular basis. It is best to set a payment date on your follow-up letter and call your customer on that date if your payment has not yet been received. Having a written script for any follow-up phone calls you may need to make may make this process easier for you.

  Your tropical vacation

  Remember that it is your business. You call the shots. If you let your customers dictate when you will be paid, you will always suffer a poorer cash flow than if you are aggressive about your payment policies. So, take an hour, sit down, and write up your payment policies.

  • Who will you offer credit to?
  • How much credit will you offer?
  • How will you determine your customers' credit worthiness?
  • When will your bills go out?
  • In what time frame will you expect payment?
  • How will you follow-up if a payment is not made?

  As you sit down to set your policies, consider my favorite antidote:

  Sally owned her own restaurant supply business. Jesse, the owner of a small catering business, was a new customer of Sally's. Jesse owed Sally money for products Jesse had purchased for her business. Sally invoiced Jesse for these products, but Jesse failed to pay her bill on time. Whenever Sally tried to follow up on the overdue payment, Jesse cried about how poorly her business was doing and how she could not possibly pay her bill at the moment. Finally, Sally became so furious that she called to demand payment. She had decided that if payment was not made immediately, she would send Jesse's bill to a collection agency. Unfortunately, when Sally called to confront her delinquent customer, Jesse's secretary told Sally that Jesse and her husband were not available to make payment. They were vacationing in Hawaii for ten days...

  The question is do you want to be the one who finances your customer's tropical island vacation?

  Article written by Cindy Vandewater. Cindy Vandewater is a C.P.A. offering personal and small business accounting, tax, and consulting services in North Hampton, NH.