10 Steps for Getting Paid on Time
August 20, 2010
If we don’t get paid, we go out of business. So with more debtors delaying payment in these tough times, taking action to collect money should be a top priority for small companies.
Few small businesses can afford to turn customers away, but being timid about stretched credit terms puts your own company in danger. If you’re not being paid on time it’s harder to find money to settle your own outstanding debts.
You didn’t start your business to provide a free credit service to suppliers. But how can you collect money owed, and at the same time, avoid bad feelings developing from previously reliable customers who are falling behind?
Try these simple in-house strategies:
1. Review payment termsRe-assess your payment terms for the current market conditions. It could be time to offer additional payment options, such as PayPal, debit card, or to accept additional credit cards (with an appropriate added fee). Consider putting new clients on tighter payment terms on a trial basis with a review to follow, include a small discount for on-time payment if you can afford it.
2. Avoid firm tactics with regular customersYour regular, normally reliable, clients deserve different treatment in debt recovery. Perhaps they came on board years ago with a handshake and now seem like ‘family’? Try co-operation and communication, rather than a heavy hand. A phone call from the director will strengthen relationships between valued but dawdling customers and is a chance to personally explain the impact of late payments on your own cycle and survival. Be ready with options for part-payment or a suitable suspension of supply. Be concerned, but stay firm enough to get the account settled.
3. Credit-check all new clientsIt’s worth the fee to do a background check on new clients, despite the temptation to automatically take on anyone new when business is slow. The cost of your staff’s time chasing money and the potential price of debt collection later is not worth the risk. Besides, a reference check should be accepted as ‘company policy’ by new customers.
4. Focus recovery ‘power’ in the right handsAvoid the trap of turning your sales people or service staff into debt collectors. Mixing messages about employee roles will do more harm than good in the long term. Give the job of bad debt follow-up to one person, along with a set of clear guidelines for action and your full support.
5. Set terms at the saleThe best time to get the message through about payment terms is when you close the sale. Outlining credit expectations early sets the right tone and foundations for later accounts follow-up if necessary. Make it a prominent part of the contract when customers place orders.
6. Empower your invoiceInstead of a monthly run, consider sending invoices as soon as a service has been carried out or when a product is supplied. Print the actual due date on the invoice, rather than a “within 30 days” instruction. These simple changes will speed payment, improve cash flow and identify problem accounts sooner.
7. Calculate average debt ageYou run regular reports to check debt ‘age’, but how do you use the results? To measure average payments against your target terms, divide your accounts receivable by annual sales on credit (not cash sales) and multiply by 365. This shows how efficiently you are managing debts overall, compared with your goal, of say a 30- day payment cycle. A result of ‘55’ for example, will show you are averaging 25 days over your target.
8. Set a collection policyThe chance of recovering payment reduces the older a debt becomes. Establish firm rules for follow-up, such as: a phone call at 7 days overdue; a letter at 14; another call at 21 days; stop supply at 30; write a letter to your collection agency at 60 days. In line with this schedule, set suitable options at certain stages, depending on your relationship with the customer, like part-payment, an instalment plan and whether further purchases are allowed (and their value) if accounts remain overdue.
9. Collect information Securing thorough information about a new account avoids obstacles to debt recovery. Collect as many telephone numbers and alternative contact names as you can and ensure all forms are signed. If possible, visit the customer’s premises. A personal visit gives a valuable impression of their circumstances that a phone call can’t reveal.
10. Be fearless and surviveRemember, uncollected income is just the most obvious impact on your cash flow. Prevention measures will save you the hidden wasted costs of time spent chasing payment. Don’t hesitate to ask firmly for due payment because you fear losing customers. Non-paying clients are not worth having.
Top 10 Cash Flow Tips
July 23, 2010
1. Know your business’ balance sheet thoroughly.
This may sound obvious, but, as your accountant can confirm, many business people don’t know how cash flow works and its significance to keeping their operation afloat. Many owners focus on their business’ profit and loss statement alone. It’s a potentially fatal mistake because healthy profits can mask an impending cash flow crisis. Profit and loss statements don’t usually contain the information required to make an adequate cash flow projection. For that, you’re going to need a structured balance sheet that includes all the influencing factors including debts, interest payments, inventory and so on. This is the basis for your cash flow projection which represents an “educated guess” at the likely incomings and outgoings over the period of time you have selected to map out.
2. Set up a cash flow budget.
You need to focus on forward planning to generate a “best guess” about likely future sales and expenses. There are some cash flow software tools around, but you can also set up your own program in Excel. If you’re not familiar and skilled with Excel software, ask your accountant for help to set it up properly initially. They can also help you select suitable cash flow software.
3. Review and update cash flow budgets regularly.
It’s your best insurance against potential cash shortages. If your business has a predictable cash flow, then cash flow budgeting on a quarterly basis is often enough. If you’re already visiting your accountant for other tax related matters, then you can get a cash flow budget prepared at the same time. The rule of thumb is that the greater the cash flow uncertainty a business faces, the more often a new cash flow budget should be prepared.
If cash is really tight, you might need to move to weekly projections, and decide which invoices you’ll pay and whom you need to get payment from as soon as possible. Watch bank balances and make sure you don’t have checks sitting on a desk waiting to be deposited. This can be time consuming, but you won’t be the first business that has had to do that from time to time.
Rapid growth sounds good but, ironically, too much of this good thing can bring on a cash crunch – which takes many business owners by surprise. A sudden spurt in sales is often accompanied by a run down in stock in-hand and debtors not being tracked or followed up when they go overdue. Strong sales one month often means a cash shortage next month. By monitoring the business’ cash status you can arrange credit from suppliers and banks to cover the temporary shortfalls. However, these arrangements take time to set up so you need to be prepared in advance.
4. Set your credit terms carefully.
If the nature of your business requires offering credit, then it is important to set clear limits to your terms of credit.
5. Get payments in quickly.
Master the art of debtor management. Let debtors know how much time remains before due dates. Stay in close touch with major debtors as payment deadlines approach. Offer small discounts for early payment as an incentive.
6. Pay your creditors strategically.
Take advantage of credit terms and prioritize payments according to the consequences involved in going overdue. Wages, taxes and direct debits are at the top of the list for on-time payment; key suppliers may be prepared to wait a while to keep your business. Don’t pay early just to get a discounted price unless getting the discount is better than being without the cash.
7. Plan for the lumps.
Be aware of when lean cash flow patches are coming up and plan accordingly. Avoid funding major purchases from your business’ working capital unless you are sure you have the cash to cover it.
8. Get finance products working to your benefit.
Overdrafts, premium funding, lease facilities and cash flow funding products can all be excellent tools to help match a business’ cash supply with planned outlays. Even the business credit card can be a good way to ease the squeeze as long as you are sure the debt can be paid before interest kicks in.
9. Don’t incur tax and other statutory penalties.
Save yourself the money and the stress!
10. Keep your hands out of the till.
Make cash drawings for personal purposes according to conservative cash flow forecasts.
Tracy Cobb, CPA
Small Employer Simple Cafeteria Plans
June 11, 2010
For years beginning after Dec. 31, 2010, small employers (average of 100 or fewer employees on business days during either of the two preceding years) may provide employees with a “simple cafeteria plan.” (Code Sec. 125(j)) Under such a plan, the employer is provided with a safe harbor from the nondiscrimination requirements for cafeteria plans as well as from the nondiscrimination requirements for specified qualified benefits offered under a cafeteria plan–
o including group term life insurance,
o benefits under a self-insured medical expense reimbursement plan, and
o benefits under a dependent care assistance program.
Note: Once the Simple Cafeteria plans have been established, the employer is deemed as having met the small employer requirement until such time as the average number of employees exceeds 200 on business days during any year preceding any such subsequent year.
Tracy Cobb, CPA
New Employee Hiring Incentives
May 6, 2010
There are some important tax benefits that you may be able to take advantage of if you need to hire new employees.
The “Hiring Incentives to Restore Employment Act of 2010,” more commonly referred to as the HIRE Act, was passed by Congress and recently signed into law by the President. The Act provides employers with incentives to hire unemployed individuals. The provisions of this new legislation apply to workers hired after Feb. 3, 2010, but only for wages paid after March 18 (the date the legislation was signed into law).
For more information on this topic and other business-related issues, please give this office us a call at 480-517-0988 or email us for an appointment at
Cobb CPA PC.
Tracy Cobb, CPA
