Out-of-control bank charges and interest rates. Stress. Poor employee morale, and a tense relationship with customers and suppliers alike. Limited growth for your business or worse, going out of business. These are just a few of the negative effects of poor or slow cash flow on you and your business.
If you are an owner of a small- or medium-scale enterprise, these are some of the scenarios that have the power to make you break out in a cold sweat. This is the exact moment you need to contact a debt collection agency.
Poor profits, excessive stock, too much debt, seasonal demand, and overinvestment are some of the causes of poor or slow cash flow. But it can also be caused by poor debt management and dismal collection practices.
Although the practice of extending credit to purchasers can be an effective way to boost sales and customer loyalty, there are instances when it can affect business negatively.
Below are some ways you can improve your cash flow after you have identified poor debt management as the culprit of your poor cash flow.
1. If possible, require full upfront payment or at the very least, a deposit.
It might seem so simple, but you can avoid a lot of cash flow problems and headaches when you require a customer to pay at the outset. Cash is the lifeblood of your business. When your business has enough cash on hand, you don’t need to resort to borrowing to pay the business’ monthly expenses, fund its growth, or pay your employees.
So how do you motivate customers to pay upfront? Positive reinforcement will go a long way when it comes to dealing with customers. You can give them a discount if they pre-pay or pay upfront. If the customer is unable to pay in full, require at least a deposit or structure your invoicing to enable your customers to make progressive payments.
2. Establish standards before extending credit to customers
Before you extend credit to a customer, consider the 4 Cs of credit: character, capacity, capital, and conditions. If you are the owner of a small or medium-scale enterprise, protect your cash flow and your business by conducting a thorough background check of your customer.
If a large amount of money is at stake and if you can afford them, interview your customers. Ask for references from their banks, suppliers, etc. Check their personal and business credit report from local credit bureaus, as well as their statement of cash flows and income statements.
3. Ensure positive cash flow by establishing a good working relationship with your clients
Befriend your customers, but make sure to keep it professional all the time. Ask for and value their feedback and suggestions. Use their input to improve their experience, as well as your relationship with them. It is easier to collect money from a customer you’re on good terms with than with one that you have a tense relationship with.
4. Document everything so you’ll have something tangible to support your claims
Before extending credit to a customer, protect yourself and your business by drawing up a contract wherein the terms and obligations are set out clearly. Make sure to set out the schedule, the deadlines, and the penalties that will be accrued for late payments in the contract to prevent misunderstandings.
5. Do yourself and your customer a favor and make it convenient for them to pay you
Make the invoicing process easier for yourself and your customers by automating it. Use retail management or online invoicing software that can streamline your invoicing processes, such as Due, Quickbooks, Invoicera, Brightpearl, FastPayee, InvoiceBerry, and more. Even PayPal has its own free online invoicing system that allows you to save invoice templates and set a schedule when the invoices are to be sent.
Apart from the invoicing process, you can also make the payment process hassle-free for your customers. PayPal, Due, Stripe, Dwolla, and Apple Pay are some of the handy online payment tools you can use to make the payment process easier for your customers.
6. Establish substantial penalties for late or non-payment
Before extending credit to your customers, make it clear that you will be imposing penalties for late or non-payment for every week the invoice goes unpaid. But make sure that you clarify your deadline to prevent miscommunication. State that the invoice is due on a certain date as opposed to using vague terms or jargons such as “net 15 days.”
7. Be assertive (yet polite) when reminding a customer that an invoice is due
If a customer has missed the deadline stated on your first invoice, then it’s time to send a follow-up email. Keep your tone cool and polite, yet firm and assertive. No matter how annoying or rage-inducing non-payment is, give your customers the benefit of the doubt.
Maybe your email was routed to the dreaded spam folder, or you sent it to the wrong person in the wrong department. Perhaps the person in charge of settling invoices was busy or out on sick leave.
If your customer fails to respond to your email after a couple of weeks, make it harder for them to ignore you by calling their office. Contact the person in charge, and remind them that you had sent an invoice several weeks prior. Keep it polite, but be firm in your assertion that the invoice needs to be settled immediately.
If your customer continues to dodge their responsibility, be persistent in calling or visiting their place of business or workplace. Call every day to wear them down. A word of caution, though: never harass or threaten your customers under any circumstances.
8. If all else fails, let a debt collection agency recover your money for you.
If you have tried everything–from multiple emails to repeated phone calls–and your money still hasn’t arrived, then it’s best to hire a reputable debt collection agency to recover the money owed to you.
But before you hire a debt collection agency, check if it’s accredited by the ACA International, the Australian Institute of Credit Management, and the Institute of Mercantile Agents. Check its track record, success rate, and look for good reviews online from satisfied customers.