Using financial policies to increase business cash flow is often an overlooked tool that can keep you from leaving business income lying on the table. Setting firm financial policies that can increase cash flow can help your sales team when they encounter a prospect or current customer that asks for financial concessions.
Here are some suggested financial policy ideas to get your thought process started in the right direction.
Getting Paid The Entire Amount Up-front – Where is it written in stone that only attorneys can get paid up-front? Any service business that bills by the hour can set a policy that all customers pay a retainer up-front that matches the estimated number of hours to complete whatever the job is, and that work on the job stops when the retainer is used up and resumes when the retainer is refreshed. This is a very useful policy, and one that I operate on myself. I implemented it years ago after being burned a couple of times.
Getting Paid a Percentage Up-front – You have every right to ask for a partial payment up-front and cash-on-delivery when the project is done. Too many times a business just automatically offers payment terms or credit terms to every customer; even customers who would willingly pay a deposit or partial payment up-front.
Break Up The Payments For Big Projects – If you always offer terms to customers for big projects, make the deal based on several payments: a deposit or up-front payment to cover the cost of inventory or raw materials you have to purchase for the project, progressive payments to cover labor needed to produce the job, and a final payment. You can also include part of your profit in each required payment. Always include in the policy that a signed contract is required.
Don’t Automatically Offer Payment Terms – Unless your company is a bank, you should not be financing your customers’ purchases. Your company does not have to automatically offer payment terms to every customer. Be selective. Set policy that requires a customer to qualify to get payment terms. You decide the qualifications. Those qualifications can be based on a minimum order, consistent orders that meet a certain minimum each month. Make sure your policy clearly states the procedure for a customer to qualify for terms. Have a strict approval process, and include a clear description of your company’s approval process in the policy so terms cannot be approved arbitrarily.
Reduce The Length Of Your Terms – A business can set the length of their terms. Consider shortening your terms to 10 day, 14 days or 20 days instead of the traditional 30 days. This is especially effective if you draw on a line of credit to help finance a job order. If the line of credit payment terms are 30 days, make your terms less than that. For example you could offer terms for 20 days and perhaps offer a small discount of 1% for payment in 10 days or less. Speeding up collection further can be done by taking payments by credit card or pre-authorized EFT payments (electronic fund transfers) or direct debits you can make on the day a payment is due.
Make Late Payers Pay A Penalty – For every customer that you extend terms to, get a written, signed contract in place that contains a clause including interest charges and late payment penalties. An attorney can draw up a contract leaving spaces for you to fill in the blanks on the terms that includes a “within the law” percentage for the interest and the amount for late fees.
Putting in firm policies that govern and control your cash company’s cash flow management can immediately increase your cash flow. They also give your sales and administrative teams a clear set of company rules to adhere to that keeps cash flow arriving on a steady basis into the business.