When Donnie Cooper 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, he decided that the best way to collect their payments was to simply wait for them. As a result, he had at least $10,000 in outstanding receivables at all times.
“I always thought, ‘Oh, 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. The average small business has $5,140 per month in overdue payments, according to an Intuit survey conducted in 2011 and released in 2012. Collectively, that’s approximately $1.7 trillion a year in cash flow strain for U.S. small businesses.
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 an early payment discount
“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: If a discount is offered, they’re required to take it.” However, if your gross profit margin is thin, discounting might not be feasible, Skevofilax acknowledges.
2. Require prepayment
Today, Cooper won’t start a project until he receives payment—up front and in full. If that sounds too extreme for your business, you could require a deposit instead.
“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.”
“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: 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 payment deadline—every invoice should include a notice about your company’s collection policies.
“The bottom of every invoice needs to say in plain English, ‘Customers shall be turned over to collections and are responsible for collection costs, interest and legal fees for unpaid invoices, and are subject to credit reporting for non-payment,’” says payments expert Alexis Moore, CEO of Golden Foothills Collections, a collections agency and risk-management consultancy in El Dorado Hills, Calif. “These words are a great deterrent. Nobody wants to mess up their credit.”
If a client’s payments continue to trickle instead of flow, the best solution might be walking away altogether.
Concludes Skevofilax, “If you have somebody who constantly slow-pays you, you have to ask yourself whether or not it’s worth having that business.”
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In your business, every time someone physically handles a check or cash, it increases the opportunity for fraud. To mitigate this risk, consider collecting money electronically — a safer, cheaper, faster and easier way to collect.