We’ve all heard the phrase cash is king and know how important a small business’ cash flow is to its success. We know that we want to get customers to pay upfront when possible, collect receivables quickly, and stretch payables as long as we can. But our customers know the same and their payables are our receivables – so here are a few tips to create a credit policy that will ensure customers actually pay up when we need them to so that we don’t run into cash flow issues that could cripple the company.
First and foremost, only issue credit to customers if you really need to. You should try to get customers to pay you at the time of sale, if possible. If you do need to issue credit, make sure you only do so for trusted customers and perform a credit check before you let someone walk away without you having payment in hand.
Secondly, make sure you put all of your credit terms in writing so that there is no confusion about when you expect to be paid and how much. Make your customers sign off on the terms so you know they understand what will happen if they don’t pay you on time.
Thirdly, make sure you gather all of the necessary information from anyone to whom you issue credit so that you can easily find them if they don’t pay. You need to have their contact info, their EIN or social, and in some cases you may want to ask for a personal guarantee from the business’ owners.
You may also want to consider if offering discounts for payment makes sense for your company. Simply run the numbers – it may be more beneficial to you to give someone 2% off if they pay you within 7 days than to try to collect the full amount in 30. Of course, if you decide to do this, make sure that you have everything in writing and that both sides are on the same page about what the payment terms are.
Lastly, don’t forget to follow up. If a payment is due on the 1st you shouldn’t be waiting until the 1st of the next month to realize that you weren’t paid and give that customer a call. You can’t effectively manage your receivables unless you stay on top of them.
Have you ever had trouble collecting payment from customers at your small business or startup? What tips do you have to help other entrepreneurs get paid what they’re due?