For a small business to stay afloat and continue to grow, it is a necessity to have a healthy cash flow. One area many small businesses sustain cash flow is by granting credit terms to their clients. Credit can be a very efficient and effective way for cash to flow into the business; however, it does come with some inherent risk. To reduce the risk, consider developing a strategy and evaluate;
- The cash flow impact of delivering the product/service and time-factor of receiving payment afterwards
- The expense to your business of carrying receivables, whether in the form of a loan, partial or full payment
- Time lapse your business will allow before late charges come into effect
- Amount of monthly interest charge fees
- Potential risk of a client refusing or unable to pay
Cash is King
Although your balance sheet may reveal a healthy revenue stream, cash is still king. If your receivables are higher than the balance in your bank account, this is a good indication you may need to re-evaluate your collection strategy. In order to reduce the risk, you may want to establish a collection strategy to be paid within a preset timeline. To ensure you receive payments in a predictable, timely manner consider;
- Creating a credit application form that includes contact and credit information
- An Application that clearly states the terms of payments and late fees
- The consequence of not meeting your terms
- Including in the application that further credit will not be available until repayment terms have been met as agreed upon
- That a third party collection agency may be required to handle difficult situations
A good accounting system is your saviour
In order to keep track of your receivables, a good accounting system will be your saviour. The right system will help you stay current of any overdue account and to follow up immediately. Consider scheduling collection activities. This can be accomplished by delegating to a staff member or outsourcing to an Accounting service.
To reduce the cash flow impact of collecting on your accounts receivable, here are a few simple strategies;
- Request upfront partial payment; often 50% down payment
- Invoice immediately after the service or product has been delivered. The most effective way to approach this is by emailing or hand delivering the invoice
- Consider providing a small discount such as 1% if payment received within a preset due date. For example, ten or fifteen days from receipt of invoice
- If a client pays by cheque, deposit immediately.
Cash flow is the blood line of every business enterprise. There is always the looming risk when you agree to accept a payment after the product or service has been delivered. Essentially, you are putting your business in a vulnerable position of being exploited as each client you grant credit to carries the risk that they may not pay. If your small business decides to offer credit make sure to have established clear, specific policies for granting, tracking and collecting from your clients. Contact Banka & Company, CPA is you have any questions or need help setting up your accounts receivable system.