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By John Hemmendinger, CPA
Cash flow is a key factor in business success, and this is especially true for small businesses. Selling your goods or services is the first step, but unless you are able to manage your cash flow well, your business will suffer as you will not be able to pay your bills. Here are some tips to help you improve your accounts receivable management:
Do your customers pay now or pay later?
To some extent, the answer to this question depends on the type of business you run. For example, if you are selling professional services, most people will assume they don’t need to pay until some time after the service has been provided. In effect, you are lending money to your customers! There’s no reason business owners offering professional services have to operate this way; you can choose to ask for payment at the time services are rendered. This is often well-received by customers, and you can always make exceptions for certain services or for certain customers.
Do you make it easy for your customers to pay you?
Paying for goods at a retail store is easy; you simply hand over cash, your credit card, or perhaps a check. Do you offer the same payment options in your business? Customers will be more likely to pay immediately if they are able to use their credit card, and it is unrealistic to expect payment at the time services are rendered if you don’t offer all of the options that are generally accepted payment methods. You may even want to consider asking for payment in advance; think of the last time you stayed at a hotel – you probably had to allow the hotel to place a ‘hold’ on your credit card, with payment to be processed after the service had been provided. There is no reason why you cannot institute a similar system in your own business.
Do you accept progress payments?
Perhaps it is not feasible to ask your customers for payment in advance; if this is the case, have you considered requiring a percentage of the total cost before services are provided, with progress payments as the service is provided? This idea can benefit both the business and the customer as the business is receiving regular payments and the customer can see that they are ‘getting what they paid for’.
Do you have credit limits for your customers?
Setting credit limits for your customers is an essential part of minimizing your risk when running a business. While it’s true that setting credit limits is often just as much art as science, there are some general principles to keep in mind. New customers should be treated with caution when extending credit. Asking for (and checking!) business references can give you some indication, but this is not foolproof. In general, new customers should expect to have to ‘prove themselves’ to you. It’s a little easier with existing customers but always remember that the amount of credit you extend is the amount you could lose if the customer cannot pay.
As a general rule, for small customers, base the credit limit on the amount they can afford to pay; and for large customers, base the credit limit on how much you are willing to risk.
About the Author: John Hemmendinger, CPA specializes in providing accounting and tax services to small business owners and professional practices in Cedar Knolls, NJ. For more information, go here:
hemmendinger.com
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