The two most important jobs you have as a business owner is getting business and getting paid. Being a bill collector is one the toughest jobs you’ll have as an entrepreneur. But if you take control of the situation up front, you can minimize any delays with payments. The key thing to do is make sure you are not hit with any surprises. Does your customer pay vendors net 45? You need to know. Here are some tips that I have used to in my business to manage cash flow:
1) Make sure you understand at the signing of a contract the procedure for getting paid. Ask about their accounts payable policy. Ask about whether you can be paid via electronic funds transfer, you get your money much faster this way. Then make sure you understand what you need to do to facilitate getting you payment.
How does your invoice need to be formatted?
Does your EIN number need to appear on the invoice?
Do you need to file a W-9 IRS form to become a new vendor?
Do you need to have an EDI system in place to get paid?
Note: An EDI system is Electronic Data Interchange (EDI), which is a way to submit invoices and receive payments electronically. If you are doing business with a major corporation or manufacturer, they may require this type of system for doing business with them. The great thing about EDI systems is that all of your transactions are web-based and available anytime and anywhere via the Internet.
2) Develop a contact in the Accounts Payable department. You never want to annoy your actual customer with a payment issue until you have no other alternative. If you start out knowing a name in accounts payable its makes things so much easier if there is an issue. Call this person at start of the contact to ask them what the procedure is for becoming a new vendor in the system and getting that first invoice paid.
3) Develop a discount incentive program for paying early. Please not do not discount for paying Net 30! That is what your customers are supposed to do. Offer a 2% – 5% discount for Net 10 or Net 15 payment for your customers depending on the amount of the contract.
4) Make sure you get a deposit up front and create an incremental payment schedule. You should offer your clients a payment schedule such as 50% at the start / 25% mid way / 25% on delivery or 25% / 25% / 25% / 25%. Do not even start work without a signed contract, purchase order and a deposit.
5) Start making collection calls at 30 days to inquire about the status of your invoice. In this economy, people will easily ignore an email, letter or fax. Do not ever be afraid to pick up the phone to ask about your money. Do not wait 45-60 days to initiate collection procedures. The polite, but squeaky vendor always gets the check.
Do you have any more suggestions for managing cash flow in a small business?
Melinda F. Emerson, known to many as SmallBizLady is one of America’s leading small business experts. As a seasoned entrepreneur, professional speaker, and small business coach, she develops audio, video and written content to fulfill her mission to end small business failure. As CEO of MFE Consulting LLC, Melinda educates entrepreneurs and Fortune 500 companies on subjects including small business start-up, business development and social media marketing. She has been featured on NBC Nightly News, in Forbes, the Wall Street Journal and Black Enterprise Magazine. Melinda is also the author of the national bestseller Become Your Own Boss in 12 Months; A Month-by-Month Guide to a Business That Works. (Adams Media 2010)
These are such important tips for small business owners to know. I would also add if they don’t pay, don’t take on more projects. Love the different, refreshing perspective on a topic that often gets worn out.
Thanks for sharing such a wonderful article and I look forward to reading your article blog.
Great tips Melinda! Espciecially regarding understanding if you’d need to complete a W-9 and be part of an EDI system. I would also add a little proactive measures to ensure you maintain a positive cash flow within your business by PRICING your services for PROFIT, not just revenue generation. Also consider fixing your deposits in a way that they cover any variable cost that will need to be paid in order to get the job done. Ex. Payroll, if you need to meet any payroll cost, understand what those payroll cost may be and be sure your deposit request can cover those cost (for that project).
It boils down to basically understanding your numbers.
At last! Someone who udnertnsads! Thanks for posting!
Great tips., Melinda. Another one is for small companies to stay on top of their invoicing. I was on an assignment with a large company a few years ago and was amazed at how many of their small vendors had not invoiced them for goods or services. Months went by without them getting paid.
I think that time spent crafting a sound cash management strategy is one of the most important areas of the business in which a small business owner can invest their time. An accurate Cash Flow Projection can offer a great deal of practical utility to business owners when they are faced with cash-sensitive decisions. My blog is devoted to Cash Flow Projection and offers step-by-step instructions along with a free Excel template: http://smartbusinesscashflow.com.