Is your business profitable on paper, but tight on cash? If so, you might want to take a look at the payment terms and conditions you have established with your customers and suppliers.
If you pay suppliers faster than your customers pay you, cash outlays get ahead of cash coming into the business from sales. It is easy for payment terms and conditions to lose their alignment, because they tend to be created one at a time. Sales people promise financing or delayed payment with an eye on getting the deal and beating the competition. Meanwhile, purchases tend to be negotiated on unit price, but typically do not include terms for delivery, minimum order quantities, payment or penalties for delayed payment.
Negotiating payment terms and conditions is a balancing act that takes into consideration the economic needs of your customers, your suppliers and your own business. Terms are influenced by such factors as the size of the purchase, the time it takes to produce the product and the amount of inventory and commitment a supplier makes. So your payment terms will likely be unique to your business or industry. These four steps will help you keep your small business cash flow in check:
Ambiguity costs money, so make sure your payment terms are clear on every bill. When drawing up invoices, keep in mind the following:
Discounts and incentives can help you improve your cash flow in two ways. First, accelerating payments to suppliers may allow you to reap significant early payment discounts. Second, offering your own customers incentives for paying a bill before it’s due may allow you to collect cash faster and put it to work for your business.
When working with customers, consider the following to optimize your cash flow:
When working with suppliers, consider the following to optimize your cash flow:
Sometimes seller financing for your customers is necessary to generate sales. This is particularly true in a challenging economy where credit is tight. If you do offer sales financing for your small business, keep the following tips in mind:
The terms of sale determine the timing of delivery or transfer of the product and the timing of payment. Since time is money, the faster you define a sale, the faster you bill and collect. Here are two tips for keeping your delivery terms in line:
About SunTrust Business Owner Research: SunTrust surveys small business owners and advisors as part of its ongoing business seminars and symposiums. The small business owners attending these events include both SunTrust client and non-client business owners and are representative of the broad spectrum of businesses located in the SunTrust markets. The research cited in this report is extracted from these 5,425 small business owner surveys collected between 2007 and 2011.
This article is general in nature and does not constitute legal, tax, or investment advice. SunTrust makes no warranties as to accuracy or completeness of this information, does not endorse any non-SunTrust companies, products, or services described here, and takes no liability for your use of this information.