Turn Your Receivable into Cash Fast
by Erin O’Donnell.
Christiane Waldron once spent a month chasing $600. As president and CEO of Jenetiqa, a luxury skin care products company, she sells to salons, physicians, and boutiques on consignment. That means she’s often waiting to get paid.
One client dodged her for weeks, with a new excuse each time. She didn’t have her checkbook. She had a meeting. She needed to transfer money. Waldron drove back and forth across town time and again, trying to meet up with her in person.
“I told her, ‘I can’t extend credit. We’re both small businesses, and I have to get paid,’ Waldron recalls. “She asked for another discount.”
Waldron says clients make similar excuses with maddening regularity. Since she started Jenetiqa in 2011, she’s learned some lessons the hard way. “As a small business, you cannot operate on trust, but sometimes you don’t have a choice,” she says.
It’s common for small businesses to struggle with uneven cash flow. But business advisors say there are ways to even out the feast/famine cycle by getting paid faster. It takes planning, communication, and lots of follow up. Below, some small business owners explain how they get customers to pay on time.
Require some payment up front
Business consultant Shell Black advises business owners to require a percentage of payment up front for project-based work. His Dallas-based company, ShellBlack.com, is a Salesforce Cloud Alliance Partner that helps other small businesses set up and make use of Salesforce’s customer relationship management products.
Black says he’ll commonly ask for a 50 percent deposit of the total cost to schedule a consultant’s time. Then, he bills the rest at natural project milestones such as the completion of data migration or user training.
Ironically, the companies with the deepest pockets are the ones that seem to take the longest to pay. “Bigger companies throw their weight around a little bit. Small businesses understand the necessity of getting paid,” Black says.
Set expectations
Be direct with customers about when you need to be paid, says Neil Kristianson, founder of Only Sky Artist, a music management firm in Chicago.
In his current business, Kristianson finds himself using many of the same practices he did when he remodeled homes for a living. Back then, he would draw up a calendar for each project, laying out the work to be done, inspection dates, and so on. Payment dates were written right on the calendar, and every client received a copy. The effect was remarkable. “My accountant was amazed that my receivables rarely went past five days,” Kristianson says.
As a consultant to musicians, he still uses the calendar system. It’s adaptable to any project-based business, Kristianson says, especially those that don’t operate on monthly invoices. And it puts the responsibility on the client to manage his or her cash flow.
“Once I figured that out, I realized I had to do a better job of communicating when I need to get paid,” he says. “I got tired of them saying, ‘Can you wait while I move some money around?’”
Create an even stream of cash
Kristianson also timed his invoicing and due dates to his project costs, so that he wasn’t scrambling for cash. In construction, it’s easy to know when you’ll be buying lumber or paying a sub-contractor, so he made sure to structure his payment schedule accordingly. He learned to forecast break-even times, and that’s when he would make the next invoice due.
He also varied the number of payments based on project size. Smaller jobs were broken into three payments, but for bigger jobs he sent out up to seven invoices.
Black recommends more frequent invoices to smooth out the peaks and valleys of cash flow. Even though it means more paperwork, he says, it also means you can invoice for smaller amounts, and that can encourage clients to pay quicker.
“It pulls the cash flow forward,” Black says. “If you’re waiting until the end of the month to bill, you’ve already paid the payroll or the cost of goods on that deliverable. You’re potentially waiting 30 days to get paid.” Sending invoices for smaller amounts can also negate the need for the boss’s signature. Black knows of one company where invoices for more than $10,000 require the approval of the CEO, who is notorious for letting things languish on his desk. Get ahead of excuses One of the most common excuses business owners hear for non-payment is “I didn’t see that invoice.” Now, technology is helping to eliminate that reason. Waldron sends her invoices through QuickBooks, but she has also started following up via email, with the invoice attached as a PDF file. A week later, she follows up again with a phone call or text. And she now accepts payments on her mobile phone. “It takes perseverance, but it wears on you because the cash flow is so tight,” Waldron says. “You can’t afford to have $2,000 of accounts receivable out there.” Software like Salesforce is pulling back the curtain on customers’ claims of ignorance, too, because it tells you when a client has viewed the invoice, Black says. If you put your expectations in writing, Black says, it’s easy to remind customers about the terms of your agreement. For instance, you can reserve the right to stop work on an unpaid invoice after 30 days. Black says he recalls mentioning that to a client only once. “It’s there because it helps you have a little leverage, in case you get someone who doesn’t pay you for 60 or 80 days,” he says. Finally, Black says, don’t wait for a bill to go past due. If a couple of weeks have gone by since you sent the invoice, it’s perfectly reasonable to call and remind the customer that it’s due soon. Waldron says offering multiple ways to pay, including Paypal and wire transfer, also helps eliminate excuses. As much as she hates to lose business, she will also cut off delinquent clients unless they pay in advance. Waldron says she has learned to be persistent and to set the right tone from the first transaction. “If a customer is late in paying you the first time, chances are it will be that way every time.”
