Staying in business can be as simple as pulling out the steamy croissants from the oven right when the timer rings just before your bakery opens or as complicated as the daily coordination of a supply chain that involves numerous moving pieces and partners.
We have mentioned the challenges faced by accounts receivable before, but one item stands out as a recurring and headache-causing problem: predictability of timely receipts.
Delays or interruptions in customer payments can jeopardize all of your downstream activities, leading to potential losses, bad credit, and eventually more serious consequences for your business.
Here are several key paths and practical tips to use in order to avoid payment delays and prevent cash-flow issues.
1. Trust and communication
Business is about trust, and the key to trust is communication. Having open contact with both new and longtime customers and partners is vital to building an environment of efficient collaboration and honest mutual dependency. Good communication helps focus your common interests in order to keep them attainable and helps your business adjust to crisis and instability without defections and bad surprises. Interaction can help to sense the intentions of new customers, and a good communication channel with longtime customers makes it more likely that they won’t hide their cash flow difficulties. That may give you an opportunity to prepare on your end and also to address such problems together, proposing payment plans that can prevent defaults and save the interests of both parties
2. Know your business partners
New commercial relationships are always risky and full of unknowns, and even the best long running relationships are subject to conflict and deterioration. From the very beginning, setting up a channel or a system to identify, vet, and authenticate your partners can save money and headaches in the long run.
Sometimes, communication is just not enough, and trust can be lost along the way. Treat any disputes respectfully and promptly, and don’t let your emotions control your actions.
Monitoring your customers’ behavior is important for you to be able to anticipate and avoid uncomfortable positions and breaks in your cash flow. You don’t have to resort to any kind of obsessive, intrusive surveillance systems to do that. Just staying informed about what’s going on in the industry and keeping in regular contact with your partners is enough.
Trusting means finding where your interests meet theirs, not neglecting them. Set up processes to collect up-to-date information about your customers’ financial health where the partner liaisons and account managers can access them, and modify your Policies and Procedures to include clear guidelines on payment practices befitting the customers’ situation. Depending on the case, you can require payment beforehand or establish credit limits.
3. Know your own business
Efficient and responsible choices in payment policies are possible only if you know your business’ own needs very well. How much total customer credit can you afford in terms of account receivables? What are your essential cash needs? What are the real risks you can take? Awareness about the limits of your business will help you enforce your payment policies in a non-aggressive, efficient way and avoid unnecessarily strict payment requirements when possible.
Learn to read a balance sheet, have monthly or quarterly meetings with your sales team and accounting department, and always ask for reports on unpaid invoices. Be prepared to stop services or the distribution of products to customers that have not paid, and establish a procedure for reinstatement of service.
We’ve talked about how a low rate of accounts receivable shows your business is on the right track. A maximum of 20% is usually what a company can withstand, but conservative risk analyses show that the cash trapped in outstanding invoices should not be higher than 8%-10% of your total business income.
4. Fix your processes
A lot of payment delays can be easily avoided by designing efficient invoicing processes.
Ensure invoices are always correct, down to the last detail, so customers don’t reject them. Sometimes customers don’t even notify you that they haven’t accepted the invoice, and meanwhile, you’re still waiting for payment. Requiring them to validate the invoicing details can be an option.
Make sure that you always follow up on unpaid invoices. Streamline the payment process so your accounts receivable department can follow actionable, clear steps such as setting up automatic reminders and diversifying the notifications (phone calls, emails, or mailed statements).
In general, any possible source of misunderstanding and ambiguity in your process has to be identified and avoided in order to prevent both unintentional mistakes and deliberate strategies by customers to take advantage of the flaws that might be in your workflow. You can also include simple expedients to encourage quick invoice payment, such as offering prompt-payment discounts. Your company can offer a 1% to 3% discount if the invoice is paid within 15 days, ensuring you have healthy cash flows every month.
An alternative would be to allow a debtor to pay in interest-free and penalty-free installments. For those businesses facing hard times but struggling to get back on track, this method not only helps them maintain their relationships but also to ensure they’ll have a lower balance to pay in the future.
5. Method of payment
Many companies have switched to digital payments, but some are still using paper, which means that a check might or might not be coming. Offer incentives to your established customers to switch to ACH, credit card payment, click-and-pay or even PayPal. With an app highly-rated in terms of features and user-friendliness, PayPal also offers a business account that can be connected directly to your business checking account or credit card. If you have a website where you already accept credit cards, you can add PayPal as a secondary payment method. Once you give your customers several ways to pay that bill, they’ll simply have no good reason not to complete the transaction.
6. Platform of payment
You have to make sure that the digital platform you’re using, whether a website or specialized software, is fast and secure. Nearly 80% of online users who have a bad experience with pages loading slowly don’t return to those pages. The rule of thumb is that they expect no more than a 3-second lapse between the click and the moment a page fully loads. Imagine one of your partners trying to make a payment when your website doesn’t load the payment page. He might try one more time and then either forget or give up in frustration. Yours is just one of the bills he has to pay and his time is limited.
There are many ways to improve the loading speed of your website, and some are technically challenging. What you can do from the very beginning is to choose a competent web hosting service for your online business profile. That only requires a little bit of research.
7. How do others do it? What should you look out for?
Always be on the lookout for new solutions to problems. Innovative technology or methods of being paid are always emerging. Traditional solutions still work as well. If a customer is in trouble, you can help them by sending business their way or asking for free products/services in lieu of their debt.
Also, it’s good to be realistic about the type of service or product you’re offering. When a business starts going badly, companies tend to slash non-essential costs first. Do you service office water coolers or offer catering for company events? Are you a manufacturer of vintage toys with a very niche customer base and very few distribution centers? The type of business you have will determine how badly hit you’ll be during an economic crisis.
Cash-flow is the lifeblood of every business. Regular and on-time customer payments are key to keeping the order-to-cash cycle healthy, which in turn enables you to make well-timed investments, pay your own bills, and ensures your business’ financial health. Anything you can do to secure your cash-flow will never be too much, as long as the steps you take are within practical, legal and ethical bounds. Prevention is always better than needing a cure, and that applies just as accurately to businesses working together.