Managing Cash Flow in Your Business - Rule 2 - Don't be too lenient with your customers.
Today, I am going to share with you the reason why it is important that you are not too lenient with your customers. This important concept forms Rule Number 2 of Managing Cash Flow in Your Business.
Summary - Be direct and fair with your customers without being seen as a pushover. A clever but polite invoicing strategy will usually get you a long way. But don’t be afraid to take more formal action if you need to. Keep a close watch on your accounts receivable turnover at all times. If it’s trending up, it might be time to step up your efforts at chasing payment. As receivables age, their quality goes down, so you should act sooner rather than later.
Cost of Acquiring and Retaining a Customer
As we all know, obtaining customers can be time consuming and expensive. The cost of customer acquisition versus customer retention could reach as high as 700%, according to a report by Frederick Reichheld of Bain & Company as below:
- Acquiring a new customer can cost 6 to 7 times more than retaining an existing customer
- Over a 5 year period customer attrition rates could reach as high as 50%
- Businesses which boosted customer retention rates by as little as 5% saw increases in their profits ranging from 5% to a whopping 95%.
Don't let your customers be bully to you
Now that you have acquired new customers or have an existing list of customers, it is important that you do not let them be a pushover to you. You are not a bank to your customers. You have supplied your customers with good products and services. They should pay you accordingly with your terms. Being straightforward with your customer does not have to mean being aggressive. Here are the consequences if you let your customers dominate you.
- You will get late payment from your customers and in some cases no payment.
- They will not respect you or your business (this is more relevant for large businesses and Government departments)
If a customer has not paid an invoice on time, there are five simple strategies that you can adopt to ensure that you not only get your payment, but also maintain a good relationship with the customer.
Strategy 1 - Industry based practices
Some industries are natural headaches for receivables management, infamous for the notorious delinquency rates (such as construction and building supplies, manufacturing, wholesale distribution and Government). However, you do not have to follow the trend. Having a sound credit management policy usually helps.
Solution - Let your customers know that your business does not allow for average industry cycles. The fact that many businesses are not able to collect from customers does not necessarily mean you should give up on your receivables management. Your customers need to know that you have robust credit policies in place. You need to follow-up regularly on late invoices. You need to help them with their payments (giving them the option to pay in installments, for example). If you do what everyone else is doing in your industry, your delinquency rates will be just like everyone else’s. If you improve your credit practices, however, your customers will respond to your calls & payment requests.
Strategy 2 - Priority
You may not be ranked at the top of your customer’s payment priority list. Your product may not be critical to your customers’ business cycle, or your product may be easily replaced by products from other suppliers. Another important reason may be that your customer has other suppliers that have more stringent credit criteria. So, your customer pays them before paying you.
Solution - Have a clearly defined process for your accounts. There are many ways you can ask for the payment you deserve while still being cordial. Your customers need to know that it is as important for your business to get paid as it is for your customers’ business.
Strategy 3 - Financial Difficulty
Your customer’s business may be going through tough times and they really are unable to pay you back. This category carries by far the highest risk for your receivables management.
Solution - To avoid facing such a challenging situation, you need to constantly monitor your customer portfolio to see if there are any changes on your customers’ credit profiles. You can have an idea who is not doing well by simply looking at your customers’ credit file. As soon as you know one of your customers is in financial difficulty, you should take action. Adjust the credit limits based on the information you have. If you sold something and waiting to get paid, hurry up and get in front of the line. Because if you don’t act quickly, you may never see that customer again.
Strategy 4 - No Accounts Payable System
Your customer’s internal accounting practices may be a mess. A disorganized accounting department or a lack of headcount that knows how to track and process payables may cause delayed payments, not only to you but to everyone dealing with that business. This is a typical scenario for new companies that don’t have the systems in place.
Solution - You may need to follow-up regularly and remind your customer that they have an upcoming payment. Systematic reminders before and after the due date should become part of a standard operating procedure for this type of client. Depending on your relationship, if e-mails and letters are not powerful enough to get paid, you may have to try more severe receivables management methods and capture the attention of anyone in the company who is in a position to pay you.
Strategy 5 - Habits
If you have traditionally been tolerant towards the late-payers and had relaxed receivables management, your customers already know that there are very little repercussions to paying you late. In that case, it is obviously in their best interest to stretch the payments as much as possible. After all, it is basically free cash. The later they pay, the more working capital they will keep for their business.
Solution - Standardize your credit policies. Set up clearly defined credit procedures for all your customers. Be firm on your deadlines and your follow-up practices. Collect more information, always monitor your customers, let the world know that you will follow-up on late accounts, precisely because it is your money. ”Being predictable” is very important in credit and receivables management. All your customers should know when they will be getting a call or a letter from you if they don’t pay you. Predictability will lead to credibility. Credibility will help you get paid earlier than you otherwise would.
Credit Management System
Account receivables management and collecting payments is “one of the most surprising, upsetting and dangerous challenges” small businesses face on a daily basis. If you are finding that your aged receivables are increasing in days, you may need a sound credit management system or to tighten the existing system.
We can help you set up a credit management system for your business. Perhaps, your present credit management system is not working effectively the way you want it too. Not a problem. Let's chat further by sending us an email to wealthvisionmastery@gmail.com.
Cheers,
Peter
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