regain control of your cash flow with improved account management
Plan to Overcome Cash Flow Issues
A well-managed cash flow system is essential to the stability and growth of your business. While your business and client base may be consistent and reliable, the financial health of the business can quickly lose stabilization because fluctuating cash flow can quickly create issues for any small business.
Below we’ve detailed three steps to amp up your account management.
1. Determine What Your Clients Owe You
One of the most common problems that arise for electricians, HVAC technicians and plumbers is a late or unpaid invoice for accounts receivable after the service has been completed. Delayed payments can leave a business without the influx of cash needed for employee salaries, vendor invoices, business debts and other direct expenses.
Clients who are consistently behind or delinquent on payments are a real threat to your business. To establish consistency, have a plan in place for unpaid invoices.
Immediately following the delivery of your product and / or services, issue your client an invoice (in-person or vial email) with a due date, which is typically within 10 days of the service being performed.
Once an invoice is issued, it’s equally important to stay on top of your accounts receivable — don’t let an invoice go unaddressed. If a client isn’t paying their bill, immediately follow up to collect on this debt.
Follow-up with your client
Follow-up should start with an initial reminder letter, phone call or email at least 10 days after the original invoice is given. If your client continues to ignore payment after your initial reminder, send a second follow-up contact an additional 10 days later.
Following these efforts, if no payment has been made, a third letter should be sent combined with a phone call from a collections clerk. At this point, businesses and contractors should elicit a clear warning to their client that they may soon be charged a late penalty fee. On average, these fees charge an additional 5% on top of the client’s original invoice for each day late past 30 days.
Keep in mind that collecting on outstanding payments can be a tricky business. These measures can quickly turn a once friendly customer relationship into a hostile one. To avoid this, clearly incorporate payment schedules and late fee guidelines into your business’ contracts / policies. Agreement to these terms should be signed by your clients before work commences.
2. Determine What You Owe to Vendors and Suppliers
Small business owners know the importance of the relationships with vendors and suppliers. Mismanaging what is owed to vendors and suppliers can become a liability for the business and ruin a mutually beneficial relationship.
Unique to vendors and suppliers, sometimes it can be more beneficial to not pay early, but rather keep a consistent payment schedule to every 45-60 days, as long as there is no late penalty. This helps slow the outflow of cash and remain consistent as cash comes in from clients to help you achieve a healthy balance sheet. Your balance sheet should provide details on your business’ assets, liabilities and owner’s equity.
To establish a payment schedule, communicate with vendors and suppliers if you are going to be late so as not to harm your business’ credit or reputation.
Another simple way to forecast your needs from vendors and suppliers is to enlist the help of a cash outflow schedule. Take inventory of your supplies, equipment and tools, as well as their estimated lifespan, to better estimate what you need and when you will need it from your vendors. Ultimately, this can help you plan for larger withdrawals from your business.
3. Don’t just Break Even; Boost Your Cash Flow
Cash flow management isn’t just about avoiding debts and overdue invoices; it’s about creating a stable foundation for your business to profit and grow. To boost the inflow of cash to your business, contractors can consider solutions like adjusting credit requirements, subscription sales, incentives and more.
The best and most obvious way to create a profit for your business is to generate sales and have clients pay on time. Adjusting the credit requirements of your clients is one way to ensure that you will get paid for your services. Smaller businesses or independent contractors should consider asking clients to complete credit applications—especially for reoccurring business—and accept credit cards for payment.
Referral incentives involve a reward—usually in the form of a free gift—for clients who refer your business to someone else. Incentives may include gift cards or free inspections. This creates a win-win situation for both you and your client, as your business continues to grow and your clients are likely to return for repeat business.
Enforcing payment schedules or implementing subscription-based sales encourages clients to prepay for the services, boosting your cash inflow early on. In addition, subscription-based schedules also secure future sales and can help you determine your needs from vendors even earlier than anticipated.
As a small business owner an essential element to financial stability and profitability is to keep your clients on a consistent payment schedule.