A key feature of your business is cash flow. In order to pay your bills, purchase supplies, and fulfill your payroll, you need to have positive cash flow every month. So, how do you maintain steady cash flow? What happens if a client is late making payments? Let’s go ahead and examine some of these issues below.
What affects cash flow?
Cash flow is defined as the movement of money in and out of your business. Typically, it’s made up of two key categories: accounts payable and accounts receivable. The money that is processed by your accounts receivable team is your positive cash flow, or the amount of money coming into the business; while accounts payable encompasses negative cash flow or the money that leaves your business account every month to settle debts, manage payroll and more.
For most service industry businesses, accounts receivable normally consists of the money you are paid by clients every month for work or services provided. When your accounts receivable is higher than your accounts payable, you have positive cash flow.
So, you might think, what’s the issue? Clients pay their bills and we’ll be golden. That’s true, but there is one roadblock that could throw a wrench into this well-worn process; namely, clients taking too long to pay their bills or not paying them at all.
The typical payment term for most businesses is 30 days, meaning as long as the client pays their bill within 30 days of receipt, they will not be responsible for any late fees. However, 30 days could feel like an eternity, especially if money is tight or an unexpected expense comes up.
So, here are some ways to fix it.
Fix #1 - Shorten your payment terms.
Many businesses have set up a shorter payment period, typically asking clients to pay their bills within 15 days of receipt. A good way to ensure this works is to offer a small discount for clients that make a payment in this window. Even a discount of 2 to 5% can be enough of an incentive to encourage quicker payment.
Fix #2 - Enable credit card payments.
Even if your client pays their bill on time, it could take up to 5 days for a check to clear with your bank, extending that 30-day payment window to something more like 35 days. The best way to combat this is to encourage credit card payments (which is an easy feature you can enable within Estimate Rocket). Having an easy "Pay Now" button within your invoice is an immediate call-to-action and makes it convenient for customers.
Fix #3 - Automate your invoices and your follow-ups.
If you’re using Estimate Rocket, all your invoices should be sent via email when it's an option. By utilizing this feature, you can usually cut down or even eliminate the lag between completing the project and invoicing the client. If you have credit card payments enabled, you can even collect payments in the field.
A follow-up email to an unpaid invoice is to be expected and with the Estimate Rocket system, you can automate these so there is less hassle for you. Be sure to set a follow-up invoice email If a customer is coming up on the deadline and still hasn't paid. Due.com reports if your invoice hasn’t been paid within 90 days, then you might as well forget about getting paid entirely because only 18% of those invoices get paid.
Fix #4 - Enforce late fees.
Place the payment terms on your invoice and stick with it. When you include the payment terms you’re 1.5 times more likely to get paid on time. If you still don't receive payment when due, make sure you’re taking the time to enforce late fees. While you may worry about hurting your customer relationships, it’s more important for the longevity of your business to ensure you’re getting paid for the work you’re doing. Enforcing your company’s policies speaks to your professionalism and commitment to success.
No matter what, you and your company deserve to be compensated for the work you’ve done. In order to keep your cash flow positive, consider implementing some or all of the tips above so that you have long-term success.