Expecting returns on spending seems counterintuitive. How can you earn money with what you spend? There are several areas to target and we will examine each one in this series. The first is to use your credit policy wisely. Do you bill your clients on a regular and punctual schedule? Your customers can’t pay for uninvoiced items or services, and the longer it takes to receive an invoice, the more likely it is that payment will be late. Although you will have paid vendors and payroll, you will be waiting for payment and perhaps financing your operating costs with interest-bearing loans.
Be sure to clearly describe your billing terms and policies to your customers. Most customers will assume 30 day terms if you don’t tell them otherwise. And think about what your terms are before extending credit to customers. How long can you afford to carry the cost of credit? And remember that cost includes all the expenses incurred to produce the product or service you are selling and the cost of incurring that expense. Even if your cash flow allows you to extend credit without borrowing, there is a cost to someone else using your money and that expense must be added to the cost of the sale.
Will you offer a discount for early payment?
Will your margins allow you to offer this discount and still make a profit?
Do you have the ability to track when a discount should be allowed and will you re-invoice that discount if payment is not received on time but the customer still takes the discount? These are all important questions to answer before deciding to offer credit to your customers. If you don’t take the time to answer them, you risk your cash flow, your profits, and perhaps the success of your business.
If you decide to offer credit to your customers, it is very important to have an easy-to-maintain age of accounts receivable. This document is standard in almost all computerized accounting systems. It will break down your outstanding accounts receivable into various categories based on the age of the invoice date. The most common categories are current, 30 days, 60 days, 90 days and more than 90 days. And you must be willing to make the phone calls or send the letters to request back payments. This is an area that many business owners are reluctant to do. And remember that there are laws in place that prevent you from making threats, using objectionable language, and harassing people. The best way to handle delinquent customers is to politely explain why you are calling or writing, ask if there is a problem with the product or service they received, and if there is a solution to correct the problem. In the event that the customer does not have the funds to pay in full at this time, you may want to suggest a payment plan that they can stick to. And get it in writing with your signature along with a clear explanation of what the consequences of non-compliance will be.
Of course, by carefully checking your credit references, you can avoid all of the above. Request the name of your bank and at least three business references with addresses and account numbers. And follow up on your referrals. Check if their references are real (they are listed in the phone book, for example). Call your references and ask how long they’ve been customers, what their payment experience is, if they’ve ever paid late. There are also services that provide credit reference checks for a small fee.
Extending credit to your customers can increase sales if you’re prepared to do the work necessary to keep your costs down and your customers’ payments on time.