Business success depends on more than just a volume of sales. You also need to be receiving the payment for those sales. That might seem like an obvious statement, but a surprising number of small businesses find themselves in a cash-flow crunch because they’ve made sales but are still waiting to get paid.
Reasons Slow-Paying Customers Might Be An Issue For Your Business
If you’re finding that you seem to consistently have slow-paying customers, you need to figure out why that’s the case. Here are a few possible reasons:
- Sales Order Errors – Are your sales orders easy to understand, clearly and accurately detailing the terms and payment agreement? Do you have systems in place to ensure that information doesn’t get missed and that everyone who needs to know the details can find those details easily?
- Order Fulfillment Errors – Does your production team regularly get the order wrong? If so, why?
- Ineffective Accounting – Do you have a consistent system to track accounts payable and accounts receivable (money needing to go out and money expected to come in via sales orders)? Do you know who owes you money and how much they owe? How are you keeping track of that information?
- Customer Delays – Do you have customers who are using you as a bank, delaying payment so they can pay other vendors first?
- Inefficient/Ineffective Collection Processes – Have you been attempting to collect payment, but end up having to try multiple times with little to no results? Could you try using a different collection procedure? Is there a different member of your team that might be more effective in this process? (Consider investing in a business course that teaches about payment collection processes.)
Payment policies and procedures build credibility. Don’t be afraid to establish them and enforce them. When a customer thinks your billing and collection process is poor, they may take advantage of you.
Possible Internal Solutions
Even if your billing and collection process is working for you, slow-paying customers can still become a problem. Take some time to think about what it’s like to do business with your company from the customer’s perspective. Then, consider the following possible solutions:
- Standardize and streamline procedures for product or service quotation and order management. For example, who creates the bill and how? When do you collect on the bill and how?
- Know and understand the cash flow traits of your customers’ businesses and tailor your collections strategies with them in mind. For example, some businesses work on contracts and receive payments only when certain project milestones are reached.
- Make sure there is clear communication in all business interactions – both between departments and with your customers. For example, do you have technology in place that allows your entire team to see where orders are at in real time?
- Use potential shipment as leverage to collect on old receivables. Don’t send out new customer shipments when you have not been paid for the last one.
- Don’t commit to a new project or order until you know what it will cost you. *
- If possible, know the creditworthiness of your customer. Adjust credit terms based on the customer’s history of payment. For a big project or sale, it may be a worthwhile investment to request a business credit report of your customer.
- Consider offering lease financing if your business sells products (not services). There are many advantages to leasing, even if a customer has the ability to pay for their order in full upfront. By giving them the option to lease, you get paid right away and collecting monthly lease payments is up to the lender. (If you’re interested in offering this option, we’d love to help you with that!) Also, this would take care of checking the creditworthiness of your customer.
*You Need To Take Care of Your Business, Too
When you are working hard to provide the products and services that your clients need and want, it can be tempting to make accommodations without regard to the needs and demands of your own business. But your business needs to make money to thrive. You won’t be able to continue operating and providing for your customers if you can’t afford to stay in business.
Before taking on a new project or order, consider your own costs. Know what it will cost you first before agreeing to a sale. Some costs to consider include:
- Time/ shop costs
- Interest on operating lines for materials
Don’t let a large order or sale scare you, but know what you’ll need to fulfill it. Do you need progress payments or deposits? Some companies might be hesitant to agree to a payment structure like that, but you need to take care of your own business, too.
Save Yourself Some Stress
If you’re currently waiting on a slow-paying customer, it can be difficult not to panic. Stop. Take a breath. We have one more suggestion for you: Factoring.
Factoring, also known as “account receivables financing”, treats your invoices as assets. If you have an invoice for a product that has been delivered or services rendered, the invoice qualifies for factoring. You can sell your invoices at a discounted rate, allowing you to be paid when you need it most, increasing cash flow, and enabling you to continue to grow your business without waiting for slow-to-pay customers. (We’ve written about factoring in more detail here.)
Don’t allow slow-playing customers to drag your business down. Your business deserves success, too!