Save your cash flow by reducing debtor days
We've all heard the phrase "cash is king". And yet, barely half of Australian small businesses were cash flow positive in June 2019, according to Xero.
There are so many profitable businesses that run into the ground because they didn't manage their cash flow properly.
One of the simplest ways to improve your cash flow each month is by managing your "debtor days". Debtor days are how long it takes for your clients to pay you. It can be a huge killer of cash flow.
Here's how you can cut down your debtor days, and increase your cash flow:
1. Review your payment terms
Say goodbye to 30, 60 or 90 day payment terms. Make sure it is clear in your payment terms that you require payment in 7, 10 or 14 business days.
Make sure you notify your existing clients, and give plenty of notice before their next payment is due so they can adjust accordingly
(clients don't like surprises).
2. Follow up
Don't let clients call your bluff and assume they can stretch out payment to whatever suits them. Contact them with a gentle reminder that they have an outstanding bill as soon as it's overdue.
If you're not comfortable calling and following up on payments, consider hiring a part-time debt collector. They will call on behalf of your business and ask (nicely) for the client to pay their bill.
You could also use an automated program like Chaser, which sends reminders and follow up emails to clients from your business email address.
Plenty of businesses outsource this to a third party to preserve the positive working relationship they've built with their clients.
3. Make it really easy to pay you
Reduce the number of excuses clients can find to delay payment by making it so easy they could do it in their sleep.
Have a direct link to payment on your invoice. Include clear payment instructions. Give plenty of payment options - utilise bank transfer,
BPay, accept credit cards and AMEX (with the relevant additional fees). Teach your admin team to walk clients through the steps on the spot
if they call up with questions.
4. No pay = no supply
This applies more to serviced-based businesses, but stop working for clients who don't pay their bills!
You should have it clearly stated in your payment terms that if clients don't pay their bill within a certain amount of time, you will stop supplying your services for them until it's resolved.
Don't keep working for them in good faith. You could end up four months into a big project with no cash to show for it, and then the client could .
Have a policy in place, and stick to your guns!
5. Charge interest on late payments
Nothing speeds up the payment process like increasing the amount clients need to pay back.
Just make sure everything is clearly stated in your relevant work agreements and payment terms.
Instead of charging interest, you could also consider a flat "late fee" (although this might not cover your losses as much if the
debt stretches out for a long time).
If you're consistently having trouble with clients ignoring your payment terms and dragging out your debtor days, you might need an overhaul of your policies and procedures.
Feel free to get in touch with us about putting together a solid system that works for you. We've helped many clients overcome cash flow issues over the years.