There’s a parable about a man who built his house on rock and a man who built his house on sand. When the rains came, the latter lost everything. It seems evident that only a fool would build on sand, but you will be surprised by how often all of us resort to the easy way out – shortcuts and compromises – all the while telling ourselves we’ll sort it out later.
Putting in place a good cashflow structure for your business is like giving yourself a solid foundation for the future, but it’s not unusual for the process to be plagued by compromises.
The good news is that it’s never too late to start.
Businesses have a way of starting small and evolving organically. In the early days of a company, customer relationships may be more personal and unique. You may be tempted to agree to special arrangements like payment terms and methods. You tell yourself you need the business, but this can quickly become messy and will most certainly impact your business further down the line.
If you have been in business for some time but you’re tired of struggling with cashflow, or your company is relatively new, it’s never too late or too early to start with setting good cashflow policies and processes. The most important thing is not to be wishy-washy about your policies and structures but to act consistently and firmly, no matter how tempted you may be. Like most temptation, giving in brings pain later.
Reminder emails and texts
Spark does it. A day or so before your telephone bill comes due, you will most likely get an email reminder from Spark. If a big corporate like Spark can send reminder emails, why can’t your small business? A common reason for not sending reminders is that we want to protect our customer relationships. Remember the man who built his house on the sand?
Set in place a reminder email to go out the day before your invoice is due. If you can implement the policy at the start-up stage or if you are already in business and are worried about ruffling feathers, apply the reminder email or text rule to all new customers moving forward (at the very least).
The Spark email reads:
This is a friendly reminder that your bill is due on 21 April 2021. If you haven’t already, please pay $xx.xx on or before the due date.
Very easy, very simple. Do the same with your business.
Past due invoices
When an invoice becomes past due, do you put off calling to follow-up? Do you tell yourself that you’ll wait a couple of days because you’re sure they’ll sort it soon enough? The truth is that most late payers do eventually pay, but that doesn’t mean it’s the right thing to do, and it does nothing to help your cashflow. If the bill is past due by one day, pick up the phone or at the very least send an email reminder. Opening up a dialogue sooner rather than later gets you paid quicker.
Consider automating past-due follow-up emails to save yourself the time and the angst of doing it yourself.
Set clear payment terms
Corporate clients may resist your payment terms, or you may choose to adopt standard industry payment terms, and that’s all acceptable – so long as you have payment terms that will spare you cashflow pain. Agree on these with your customers upfront and get it in writing either in your contract or email.
One cashflow enabler you might want to try is putting a deposit condition into your payment terms, like 25 percent or even 50 percent upfront.
Invoicing is not an afterthought
Set aside a specific day to do all your invoicing and stick to it.
Business owners can get so caught up delivering the work that they leave their invoicing to the last minute. Sometimes if, for example, a client hasn’t signed off on a piece of work, you may want to delay sending an invoice. However, if the client is the reasonable reason for the delay, then you should invoice regardless on the day you are due to invoice.
Processes and policies, particularly those related to cash inflows and outflows, are the bedrock of your business. Build on them, and you will have a solid foundation when those rainy days come.
Tax Management NZ has produced a guide called Better Cashflow Management. You can download your free copy here.