When Donnie Cooper first started his business in 2008, he went out of his way to avoid doing anything that might upset his clients. Afraid to rock the boat when it came to collecting payments, he decided the best approach was to simply wait for clients to pay. As a result, he had at least $10,000 in outstanding receivables at all times.
“I always thought, ‘They’ll pay me eventually. If I push them, they might fire me,’” says Cooper, founder of Inboundable, a Panama City, Fla.-based consultancy that teaches search engine optimization (SEO) to small business owners. “It turns out I was the cause of the problem because I set the expectation that I wasn’t important. That’s a terrible way to run a business.”
Cooper isn’t alone. 64 percent of small businesses receive payments late, and the average small business has almost $84,000 in unpaid invoices.1 Plus, of the small business that fail across the United States, 82 percent ultimately do so due to poor management of cash flow.2
Indeed, every dollar you earn is a dollar you can use to strengthen your business. Consider these four tips for getting your customers to pay you in full and on time.
1. Offer a discount to customers who pay early.
“The early payment discount is one of the oldest tools in terms of collecting receivables faster,” says Manny Skevofilax, principal at PORTAL CFO Consulting, a Baltimore-based firm that provides outsourced CFO services to small businesses. “In fact, some large corporations have a policy that if a discount is offered, they’re required to take it.” However, Skevofilax acknowledges that if your gross profit margin is thin, discounting might not be a realistic option.
2. Consider requiring prepayment for services.
Today, Cooper won’t start a project until he receives payment up front and in full. If that sounds too extreme for your business, requiring a deposit is another option.
“In project work, try to get 50 percent down,” Skevofilax advises. “If you collect another 30 percent after a significant milestone occurs in the project, with the remaining 20 percent due after you’ve completed the project, you’ll have collected 80 percent of your money while you’re still doing the work.”
3. Update your collection processes.
If you want clients to pay faster, then condition them to do so, says Skevofilax, who recommends establishing a deliberate invoicing and collections procedure and sticking to it.
“For example, a lot of people have switched to email invoicing,” he says. “It’s more cost-effective and less time-consuming, but there’s a chance your email could get caught in a spam filter or not get read because somebody was too busy. So, you have to establish a procedure. For example, we will email invoices on the first of the month and then place a follow-up call on day five or day seven.”
4. Optimize your invoice
An invoice can be a powerful tool. In addition to basic information—including a strict payment deadline—every invoice should include your company’s collection policies. Make sure you’ve spelled out clearly that customers are responsible for fees or may be subject to credit reporting.
If a client’s payments continue to trickle instead of flow, the best solution might be walking away altogether.
“If you have somebody who constantly slow-pays you, you have to ask yourself whether or not it’s worth having that business,” Skevofilax says.