How can I have better cashflow management and get paid faster by my Customers? This is one of the most common questions we get asked by our clients.
Cash is King
Cash is indeed King. Its not a client but the most important rule of business. If you do not collect money in fast enough to pay your staff wages, taxes, suppliers and any loan repayments to banks you will start a virtual cycle of pain. Unhappy suppliers may hold back further supplies. Late taxes can cause penalties and interest payments. There are legal obligations on your staffing costs.
I have worked in cash tight, loss making businesses and it is not pleasant dealing constantly with unhappy suppliers, whilst desperately trying to get customers to pay in money they owed. But even otherwise profitable businesses can run into cash issues if they do not adequately manage their receivables, the money owed from their customers. Cashflow management in loss making businesses is especially stressful and difficult as there is simply not enough money coming in to cover outgoings. However, even profitable businesses can suffer if they have poor cashflow management.
The problem is widespread
Xero has compiled statistics on how long it takes for an invoice to be paid by a customer. It was found that this is normally 40 days on average. So in essence it will take your average customer to pay you 40 days after your invoice is raised. Is it any wonder that many businesses, possibly living hand to mouth, run into issues with just a handful of late payments causing a ripple effect? In deed a further report finds that 82% of business failure is related to poor cash flow. 82%!!!
At Nuvem9 strong, consistent cashflow management and understanding is absolutely core to our services. For all new clients we work with them to ensure that their credit collection / receivables management function is strong, effective and consistent, as this gives them the best means to build a wider cashflow management system.
To do this we advocate a simple 4 step approach to ensuring that your customers are most likely to pay you on time and when you need the cash:
- Bill efficiently & fast: get that invoice out as soon as work is done or a delivery is completed.
- Preempt any queries the customer may have: include a full description, provide pre authorisation via a Purchase Order reference or signed contract, ensure rates and quantities are clearly specified etc. You want that invoice to be clearly understood and quickly approved at the customer side include a full description, provide pre authorisation via a Purchase Order reference or signed contract, ensure rates and quantities are clearly specified etc. You want that invoice to be clearly understood and quickly approved at the customer side.
- Make it easy to pay and present range of options: give as many options for a customer to pay and ensure this is clearly stated on the invoice (e.g. bank details, stripe and Paypal details for online payments, offer a direct debit option etc.)
- Remind the Customer to Pay: It’s no good hoping the invoice will be paid on time. The statistics quoted above show this simply doesn’t happen. We therefore advocate follow up checks before an invoice is due to ensure that the payment date is coming up and preempt any attempts to delay. In the event the invoice is still not received on time it is imperative that you maintain the communication until payment is received.
The 3 Types of Customers
Of course for even better cashflow management it also helps if you understand the customer you are dealing with. We like to categorise them into 3 types:
- Will always pay on time: These customers have themselves well organised and efficient accounting processes, meaning they process and pay on time every time. If they have a query they let you know well in advance of the due date. They are nigh on certain to be 100% sure to pay you when required, and often do ahead of due date.
- Right Intentions but are disorganised: These customers have the right intentions, value your services and genuinely want to pay on time, but they have disorganised accounting processes which can lead to delays. Its really important to follow up with these customers in advance and make sure you can tie them down to a due date. We really recommend making it easy to pay via an online link or possible even taking direct debit payments as this customer will appreciate this as much as you.
- Problem payers: customers that persistently pay late and need constant attention. This may be because they are a big operation with bureaucratic systems, or they simply have cashflow management issues themselves. For these customers we recommend regular communication, and possibly levelling of punitive action like interest, passing the debt to agencies in extreme cases.
Why cloud apps are so important to this process
The final way in which we can advise you to vastly improve your cashflow management with regard to receivables is using current cloud technology. In this specific space you can get highly affordable, feature rich tools that enable you to automate a lot of the communications and processes. This leads to accurate balances and consistent approach, both of which are core to a successful receivables management process.
- STEP 1: Start Using Xero: with regards to customer invoicing this allows you to:
- Email invoices and send to multiple recipients
- Set-up automated recurring invoices (for retainers for examples)
- Invoice on the move and via the Xero app so you can literally bill as soon as work is done
- Attach relevant files – e.g. some of our clients attach the report being billed for, or a Purchase Order.
- STEP 2: Add an online payment link e.g. GoCardless, Stripe, PayPal. This enables the invoice to be viewed and paid online (via Stripe or PayPal for example). It also means you can automate the collection of money from the customer via Go Cardless direct debit and its integration with Xero. We have customer invoices that get raised automatically and collected automatically via GoCardless for Xero. Literally no effort at all from first set-up and guaranteed payments in.
- STEP 3: Connect Chaser to Xero. Chaser is a powerful credit collection tool that enables you to repeat daily and weekly receivables management tasks via the Chaser software. However, the beauty of Chaser is that it allows you to create tailored messaging and segregated customer lists, meaning you can bring a full human touch to the automation. By automating a lot of the routine this is an excellent way to get surety on the non-problem accounts, and free up time for additional analysis and decisions on the problem payers.
Strong cashflow management is the fundamental building block to ensuring a business can succeed and grow safely. We hope this article has provided you with a better understanding of how that process can work with regards to receiving money in from your customers and how to better understand your customers to identify issues in advance. Furthermore, we really recommend you try the technology we have suggested and free up as much time as possible in the process via automation.
Cashflow Management is core to Nuvem9’s Virtual Accounting Services and we can set this up today for you and get your customers paying quicker. We also have a 30 day challenge – free set-up and nothing to pay if we don’t reduce debtor book in 30 days! Contact us today for more details.