After talking to many of my friends and assoicates that run small businesses two things are clear. All of us want regular payments from customers and all customers pay in different ways and time frames. This means tracking them and finding signs or problems is hard and time consuming.
After years of running businesses here is a summary of how I bring in the payments faster and more regular with some clear actions.
Being in business you will generally be dealing with business of roughly the same size. With only 50% of small business around after 5 years and only 30% around after 10 years, (small business trends failure rates of small businesses has more information) its critical to know what is going on before it effects you.
First, you need to list customers by profit and revenue. It will most likely become clear that 70% or 80% of your business comes from 20% of you customers. Why is the percentage always 80-20? If you know drop me a line. This is where you need to focus your time and effort, if you can bring in 80% of the revenue on time or earlier you’ll be doing well.
Action: ask your accountant or bookkeeper to rank your customers by revenue in the last year. Ordered by highest revenue customer first.
Once you know this you need to work out the average payment terms for each customer in the top percentage. What “top percentage” I hear you cry, start with 10% and see how much time this takes then increase it until you get to 70-80% of the revenue or ask your accountant for the top 80%. Your accountanting package will be able to provide this report.
Action: ask your accountant or bookkeeper to draw up the list of average payment terms for the last 12 months and the last 3 months. The payment term is the time from when you delivered the invoice to when the full amount was paid.
As a business you’ll probably know by now, that unless you are a retail or pay immediately service, terms of payments are just a guide and late payment penalties just annoy customers. There is an acceptable payment period that each customer has. This is the report you have just created.
Now four easy steps to get your invoices paid more regular and faster:-
- Communicate, communicate to the top 20% regularly. Deliberately written twice as its such a key point. Monitor the top 20% of customers and their payment terms.When a customer reaches 60-70% of their payment term, for example: if company ABC normally pays within 30 days when they get to 20 days phone them. “Hi Jane, I’m just checking you received my invoice and are still ok to pay and have no questions about it.”
Then follow the conversation with, “when do you think you’ll likely to get to pay it?” or “have you included it in the next payment run, and when would that be?”. This is where you will hear any complaints or delays to payments, the first red flag.
Ring again when the customer is 110% overdue so in this case 33 days. “I just noticed your invoice is still outstanding, was there a problem or did you just miss it?”
Continue this line of nice polite reminders every few days, until its clear you have highlighted a potential risk of no payment or better yet been paid.
- Send them statements regularly. This is a list of the invoices they have outstanding and how long. Your bookkeeper can prepare this from your accounting system then all you need to do is email it. This will help the disorganised customers people.
- Create a watch list. List the companies that have regularly paid over the terms.Ring every single person on this list and find out why they normally pay out side the terms. This should be a polite conversation, “for my understanding of your payment process…..”.
This could be that they only pay invoices on the last Friday of the month and you always send the invoices on the first Monday or they are forgetful / disorganised. Either way it will highlight hopefully if they are having troubles paying or another reason that you can quickly adjust. For example invoicing 1 particular customer on the last Monday instead of the first Monday of the month.
- Ask for part payment, or move to a “milestone billing” model. A milestone billing model allows you to bill smaller amounts more regularly,for example a website designer may bill 3 times for 1 project, 1) the design phase and prototyping, 2) full website running and live, 3) SOE, Search engine optimisation adjustments and fine-tuning.
You do need to apply common sense splitting a $100 invoice may be a pain rather than a benefit. To implement this, on your next proposal or contract simply state on the invoice schedule.
And just because I’m on a roll, an extra one, a 5th way to get your customers to pay invoices faster and more regular.
- Offer discounts on early payments. I have added reluctantly, however I don’t like this as a method as it eats into your profit margin. It might be good if you absolutely need cash quickly.
That’s it, four easy ways and two actions. Please write in the comments below any other ideas you have or progress you have made.