Making sure cash is coming into your business is always important, and even more so in the current climate. But are you collecting payment from your customers in the best way, and are you making it easy for them to pay you?
Let’s talk about cash flow (again)
We’ve talked about cash flow a lot, but we really can’t stress it enough – cash flow is the life blood of a business! If cash flow is poor, your business will suffer, and ultimately perish.
If we think back to when we started out, what small business owner hasn’t worried about getting paid at some point?
Whether it’s several customers owing you a few months of bills or one customer holding back payment on an invoice, not getting paid is one of the most frustrating aspects of running a small business.
Ask yourself these questions:
- Are you making it easy for your customers to pay you?
This doesn’t just mean providing bank details at the bottom of your invoices!
- Are your customers paying you the right way for the goods or services you’re providing?
Believe it or not, there is a good way and a bad way, depending on the situation.
Making payment collection simple
Most of the time, businesses fall into a trap of billing their customers with bank details at the bottom of their invoices. Some will add payment terms, such as 30 days, but the average payment timeframe is rarely near the agreed terms.
In 2018, Xero looked at average payment times for UK businesses. A whopping 52% of invoices were paid late, with the average time to pay 30-day invoices at 40 days.
Sometimes it’s wrapped up in red tape. This is especially true if you’re dealing with big companies or the public sector. They’ll often dictate their payment terms to smaller businesses – a take it or leave it offer!
Sometimes an invoice gets lost (especially if you’re posting them – but we hope you’ve already moved to digital), and as we’ve seen, if they do get it they’ll often just pay it late. Or, in the worst case, not pay it at all.
If you’re invoicing electronically through cloud software like Xero, you can add a link allowing your customers to pay using a card or PayPal account. This encourages them to pay quickly, sparing them the hassle of logging into their online banking to setup the payment.
The other option is payment by direct debit. This is becoming more and more popular, with subscription models like Netflix and Hello Fresh only accepting payment by this method.
This cuts down on the burden of chasing customers who never stick to payment terms. You’ll find that most customers even prefer this way, as it frees up their time to focus on their business.
Even if you don’t run a subscription model business, direct debit collection is still an option.
Invoicing through Xero opens you up to GoCardless. GoCardless automates payment of your invoices by generating a collection on the due date created in Xero. Not only that, when the payment is collected, it matches it to the invoice in Xero – essentially cutting admin by half – and who doesn’t want that?!
Sadly, there will always be those few customers that drag their feet, or just simply disappear into the sunset. But if you get this bit right, your risk will be reduced and, more importantly, the money will be in your bank.
The right way to bill your customers
So, we’ve covered best practice for getting timely payment of your invoices, but are you billing the right way for the goods or services you’re offering?
It’s common for businesses to follow the norm when it comes to billing. You do the work, and then you bill at the end of the month, giving payment terms of 7, 14, 30 or even 90 days. But let’s consider how this is impacting your business.
Take the airline industry, for instance. You purchase a flight. You wouldn’t take the flight, and then expect to pay it 90 days later – the airline can’t take the flight back once you’ve flown.
The same principle goes for businesses. Can you take back your product or service after delivery if your customers don’t pay?
Yes, credit control and debt collection services can help with this, but this is costly and doesn’t help with much needed cash flow.
In recent Zoom call with a client, we highlighted issues with how they were billing for a service they deliver. They were billing for training courses after the course was taken and suffering from late payment, with their credit control spiralling.
Discussing this, they realised that almost no-one expects to go on a training course before paying for it, as you can’t take the knowledge back if they don’t pay.
By shifting how they billed for these courses, it meant the cash would be in the bank before the course, not 90 days later (if at all), adding an extra £5,000 into their bank account per month.
Consider what your business offers, and how a shift billing and payment collection will positively impact the cash in your business.
Get your invoicing and payment collection right, and credit control becomes a breeze. If research has shown that SMEs typically spend up to 1.5 hours a day chasing late payments, how much time will you save?
Don't let poor cash flow kill your small business
We can help you get control of your finances, giving you the freedom to concentrate on what you enjoy doing in your business.