Proactive Cash Flow: How to Get Customers to Pay

Posted by on November 20, 2013 in Business Financing [ 0 Comments ]

It's important for small-business owners to get their customers to pay.There are no illusions around the fact that businesses – regardless of their size – need money to get things going or to keep themselves afloat. This is especially important for startups and small businesses.

Related: Find out what financial resources your business likely needs

Startups and Small Businesses Face Similar Cash Flow Issues
recent article in The Chicago Tribune uncovered many of the challenges facing quickly growing startup businesses. Josh Phillips, president of Pyxl, told The Trib balancing growth, cash flow and new opportunities are the largest obstacles his company faces. Meanwhile, Vinny Antonio, president of Victory Marketing Agency, highlighted very similar issues, placing an emphasis on the complexity of cash flow management. Antonio said it’s extremely time-consuming trying to keep track of who owes you money, who needs to be paid and knowing which payments should be at the top of your list of priorities as your company is quickly expanding.

Related: How Your Small Business Can Process Payments like Big Businesses

The truth is not every client is as scrupulous as we’d like to believe and sometimes small and midsized enterprise owners are too polite to ask for money upfront. And many business owners feel pressure from multiple sources. According to Aberdeen Group and Transverse research cited by the firm Proformative looking into order-to-cash (O2C) cycles, 19 percent of accounts receivables professionals experience customer pressure to extend payment terms (Tweet This Stat!). At the same time, an equal number indicated they face the risk of customer nonpayment or default.

The Dangers of Customer Nonpayment
Reducing your cash flow doesn’t benefit anyone in your company and will cause managerial issues sooner rather than later. More importantly, it can impact your credit rating. According to Proformative, businesses that have customers that are consistently slow in paying for their services or products can damage their credit rating, which can make getting a credit line or loan more difficult. In a recent survey conducted by the office supplier Staples, 28 percent of small-business owners indicated they delayed hiring because of financial and cash flow problems. Going forward, you’ll hurt your company by not enacting a payment policy that ensures your clients pay up.

Related: How to Build Credit for Your Small Business

Here’s What You Should Do:

  • First, it’s important to set up a sound pricing system. Sales reps want to convert sales, meaning they’ll negotiate with customers, but straying too far from your established prices will become problematic if you become too flexible. Clients that don’t accept your pricing model aren’t going to be worth the effort.
  • At the same time, you should develop a record-keeping system for invoices. No matter how much you trust your clients, paperwork – or a digital alternative – is necessary to make sure everyone is aware of the costs. However, the more automation your business can afford, the better. Even for the smallest businesses, there are alternatives to spreadsheets. Paypal and Zoho Invoice both offer a free invoicing system, although you’ll need to pay for Zoho’s services if your client list continues to expand.
  • Which brings us to the last point, and that is to get your clients to agree to and sign a contract. In fact, do it before you begin providing the service or deploying your product. Again, using an electronic document service for this step can be an effective way to get to the crux of the issue. An e-sign contract like the one provided by Adobe can let both parties keep records of the deal.

For small businesses and startups, handling cash flow is a must. From finding the initial capital to developing recurring lines of credit, businesses need to have a plan established to help avoid unnecessary risks involved in raising revenue. Customers are the life blood of companies, and it’s important to lay a solid foundation to make sure they’re meeting their end of the bargain when they agree to do business with any small business or startup.

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