Do you have a thriving business but not cash? Don't feel bad. We can't tell you how many times we have heard this. We hope to shed light on some methods that you can utilize to speed up cash collections and/or delay disbursement.
Let's start with speeding up cash collections:
- Credit Policies: Do you have credit policies? Many times, when businesses are starting up, this is the least of their worries. As they grow, it becomes more of an issue. How do you screen your customers before extending credit/setting up accounts receivable? A non-paying customer will cause you to lose money. Be sure to screen customers and have clear and concise payment terms.
- Retainer/Deposit/Down payment: In most situations, it is completely acceptable to request a retainer/deposit/down payment from your customers. It could be 10%, 50%, etc. You set those terms.
- Timely billing: Many times, we are get caught up in providing the services that the business is built around. Let me give you an example. If you own an automobile repair shop, you are probably spending most of your time in the shop. Is running the service side of the operation taking away from you ability to promptly bill customers? If you do not send out bills in a timely fashion, you can't expect your customers to pay in a timely fashion. The office and administrative side of a business is JUST as important as the service side.
- Payment Discounts: Are you offering customers any type of incentive to pay quickly? What does "2/10, net 30" even mean?!? If the customer pays the bill within 10 days of receiving, they will receive a 2% discount. Yes, this essentially "costs" you 2% if they pay within the 10 days, but it may be worth it to have the money within 10 days verses 30— or late. You can pick any type of incentive here. Choose something that makes sense for you and your business.
- Depositing the funds: This can get even more detailed for a larger business (using electronic funds transfer and lockbox systems), but for the small business, it is very simple. Make your deposits as soon as you can to ensure they hit your bank account and are there when you need them. Again, this may pull you away from the "service" side of the business, but when you are running on low cash flow, making deposits by your bank's deposit deadline could make a difference when you sit down to pay the bills. Some banks now have "same day deposits" and/or are open on the weekends. This could be something that you consider when choosing the bank.
Let's move on to delaying disbursement of cash.
- Defer payments: Let me use an example here. Business A's mortgage payment is "due" on the 1st of every month. However, per the statement, it is not considered "late" until the 16th of every month. If you find yourself in a similar position with mortgages and/or accounts payable, this could be utilized to your advantage. You want to be careful that you will not incur late fees or interest charges. This is JUST using a "grace period", NOT paying the bill late. You never want to do anything that will impair your credit worthiness. Even if it takes a call to the bank, be sure that you do have a grace period window before making assumptions.
- Checks: Yes, yes, WE know. It is 2013 and checks are becoming less and less popular. Depending on who you are paying the bill to, this may not work. For example, because it IS 2013, sometimes when you use a check, it will take funds out of your account immediately (i.e. Walmart). However, for some vendors, the check will have to go through a process before it actually clears/post to your bank. This could give you a few days before it actually hits the bank account.Line of Credit: If you still find yourself strapped for cash each month, you may qualify for a line of credit at your bank. This would allow you to pay bills as needed when the cash flow is simply not there. This would help you avoid late fees and higher interest charges when paying bills and vendors because you can now ALWAYS pay them on time (assuming you have not hit a credit line limit). WE would recommend that you pay this as due. Although the interest rate will likely be more favorable than that of a credit card, you are still charged interest.
- Line of Credit: If you still find yourself strapped for cash each month, you may qualify for a line of credit at your bank. This would allow you to pay bills as needed when the cash flow is simply not there. This would help you avoid late fees and higher interest charges when paying bills and vendors because you can now ALWAYS pay them on time (assuming you have not hit a credit line limit). WE would recommend that you pay this as due. Although the interest rate will likely be more favorable than that of a credit card, you are still charged interest.