Welcome back to our series – The Tao of Cash Flow: How to Master Your Business Finances. Over the past few weeks, we have explored a range of topics and techniques around managing your cash flow – including creating a Cash Flow Forecast and using an A/R Summary Report. This week we will look at simple tips and habits you can implement in your business to help ensure customers pay on time.
Before we begin, let’s remind ourselves of why it is so important that customers pay on time. The short answer, of course, is to ensure good cash flow. The longer answer – if customers don’t pay on time, then you may find yourself unable to pay your bills as a business. And that means you go bust. It really is that simple.
There are many small tips that you can use to encourage customers to pay on time. A lot of it comes down to having a good set of habits and routines, using automation where possible and being clear with customers about what you expect.
The most important part of ensuring your customers pay on time is having a system in place to manage things. You need to have a system to organise your invoices, that includes a regularly scheduled time set aside to focus on the financial side of your business. We advise setting aside a specific time each week to do this. Diarise it and don’t miss it for any reason. It can take quite a lot of effort to keep on top of your finances so you don’t want to let it build up by missing a week or two. During this time, you will need to be creating invoices, checking your A/R report (that we discussed last week), calling customers to chase debts, reviewing your cash flow forecast, checking your bank statement against invoices (if your accountant doesn’t do this), uploading receipts and dealing with queries from your accountant. It is very important that your system includes a clear timeline of when invoices will be created and sent, when you expect payment to come in, when you’ll review to check whether they have been paid, when you’ll send payment reminders, and when you’ll follow up with the customer.
One of the best ways to save time with your system is to use a cloud accounting software such as Quickbooks. You can create invoices on Quickbooks in seconds and have them automatically emailed to your customer.
Closely related to the above point is the fact that within cloud accounting software, you can usually set up recurring invoices. If your business charges customers an amount on a regular basis, take advantage of the recurring invoices option within your accounting software. This will mean you only have to create an invoice for a customer once and it will then keep being created by the software and emailed to the customer automatically on a schedule you choose. That’s hundreds of hours a year saved!
If you don’t have a business model that allows recurring invoices, then you can still set up reminders and alerts. Diarise a reminder in your calendar either for that evening or for the weekly time when you deal with the finances, to create the invoice for the customer. The sooner you do it, the better. The quicker the customer gets the invoice, the sooner they are likely to pay. Your aim should be to invoice the customer immediately.
It’s the 21st century now, everyone has email! There is no excuse for not sending an invoice by email. It also gives you the advantage that the customer gets the invoice immediately, rather than waiting for it to go through snail mail (and saves you money on postage).
In your cloud accountancy software, you can very simply and quickly send email reminders to customers once an invoice becomes overdue. Here is how to do it if you use Quickbooks. You can also send them a text. Often customers simply forget about paying, and a reminder that they are overdue should be enough to quickly get them to pay. Customers should have the expectation that they’ll hear from you immediately if they are late.
It is advisable to phone customers immediately if they are late. If you have sent them a reminder text/email and want to give them a few days to pay first that’s fine, as long as you phone them if they haven’t paid within a week.
Running a successful business means knowing how to be successful with people. By being friendly and polite to customers, including on your invoices, and developing a relationship with them, it will make it a lot easier to have the difficult conversations in a friendly way if they haven’t paid on time. It will also mean less chance of a customer avoiding you if they are having financial issues and are too embarrassed to say they can’t pay immediately. However, it is important that you also don’t let yourself be taken advantage of – if you provide a product or service, you should be paid, so don’t hesitate to ask for payment.
If you are following the tips above and have the systems set up, this should be fairly simple. You need to make sure you are chasing debts as soon as they become due. You can’t be waiting months for customers to pay up or you aren’t going to last long as a business. Each week, have some time when you can call customers who are late in paying. Don’t leave it to email, make an actual phone call and speak to the customer. If they are not available, don’t leave it till the following week, try again later or the next day. When you do talk to them, try to find out the reason it hasn’t been paid. If it’s a good excuse, then maybe consider allowing them a longer time to pay, but if there isn’t a good excuse, you should give them a short deadline to pay up.
Take some time to consider how quickly you want customers to be paying you. Wherever possible, you want the payment terms to be set to “immediately”. Where this is not possible, make sure the invoice clearly states the date it was sent out and the date payment will be due by, so customers know what is expected of them. When you get a new customer, you should be upfront and verbally inform them (or negotiate where necessary) of the payment terms.
If you are struggling to get customers to pay on time, or are having cash flow issues where you need the cash in quickly, it is worth considering a small discount such as 2% off if customers pay within a week of you sending the invoice. That will encourage them to pay sooner.
This is especially important if customers are regularly paying late, or if a large number are paying late. HMRC has set out guidance on the rate here. Make sure this is communicated clearly to customers on your invoice and verbally.
Again, this is important for customers who are consistently paying late (more than twice in a year). This will ensure you get paid before providing the service to them. Or at least, a deposit will help you with some money to aid with cash flow.
While this is extra important for customers who often pay late, it is a good practice to use with all your customers. If you have payment terms set to 30 days, it would be a good idea to send a reminder email or text to customers 7, 14, 21 and 28 days to remind them of the due date. Some even advise calling soon after the invoice is sent out to make sure they received it and to ask when it will be paid. You’ll need to judge how often to send reminders based on your situation as you don’t want to annoy people or put them off doing business with you. We would certainly recommend doing this a week or a few days before the due date though.
There is a rule of life – the easier you make it for people to do something, the more likely they are to do it. When it comes to getting payments from customers, you should make it as easy as possible and offer them a range of options. You could look at online payment solutions such as GoCardless and stripe (which also integrate great with accounting software) which make it very easy for customers to pay online. Maybe you need to invest in a card payment machine if a large number want to pay by card. And don’t forget that your invoices should have all the information on them that customers need to be able to pay on time e.g. your bank account details.
This is a great option if your business takes regular payments from customers. They only have to set it up once, and then you will receive payment every month on the correct date without either you or the customer having to think about it. This is an ideal situation, especially if your invoices are automated too because it means a lot less work for you each week in dealing with your finances. Unfortunately, this doesn’t work for all business types…but consider if there is a way to make it work for you.
Wow, that’s a lot to think about and do, isn’t it? But hopefully, it’s given you some ideas. To help you with this, we have a couple of tasks for you to complete this week: –
a) Sit down with a piece of paper and answer these questions:
b) If you don’t already have a cloud accounting software package, go and sign up with Quickbooks or Xero. If you need any help with this, make sure to give us a call and we will help you get started.
Well, that’s all we have time for this week. We hope you are enjoying this series and applying the practical techniques we are recommending to help you become a master at managing your business finances. Next time we are going to look at ways to minimise the expense in your business.
To find out more about how Stryde can help you, please call 0330 043 4589.