Many small businesses do a good job to deliver their products and services but then find it difficult to collect, often resulting in a cash flow statement crunch. This may be due to the credit worthiness of a customer was not properly investigated at the beginning or it may be that insufficient attention was paid to monitoring and collecting accounts due. Either way, it benefits the business owner to establish normal credit policy, using proven methods to optimize cash flows and compliance with the terms of the diplomatic but firm way because the “sale is not complete until the money is in the bank.”
1. Optimize cash sales to avoid the risk
There is no credit risk in cash. If your company allows for both cash payments and accounts, the maximum amount of money, as a percentage of total sales, the highest level possible for industrial or commercial sector.
2. Get Deposits Wherever possible
larger sales orders, manufacturing to production and, in particular custom orders, should require a deposit of 10-50% of the final purchase price of the order time. This will go a long way to reduce cash flow population and ensuring commitment to the customer. Deposits of this type should be irreversible.
3. Suggest Credit Cards enforcement
Be sure that you have the ability to accept major credit cards (VISA, Mastercard, American Express, and discover). This is the next best thing to cash and reduce payment risk. In many cases, it also makes it easier for customers to order. Customers who object to paying in advance can be assuaged by putting a “hold” on the amount of sales from their card and payment processing only after shipping the product or complete a service. This ensures payment (for a period, usually 30 days), but has not appeared as early payment to customers. For credit card sales processed, company account is usually filed by the credit card processing company in 1-3 days for a service fee of 2-3.5%.
4. Require progress payments for work-in-progress orders or contract turnover
If you manufacture a product or perform work over a long period of time, say a few months, the sales contract your special times when payments are due (for example: 10% during the series, 40% at 60 days, the balance of completion). This will go a long way to avoid cash tightness and provide funds for ongoing projects. In many contract sales situations, the amount of the deposit is actually a profit of order and obtained upfront; balance or cost of the product is then transferred from the customer to the seller at the usual payment.
5. Develop and use a credit application form
Every company, big or small that conducts sales invoiced should have credit programs. This can be as simple as a single page, faxable form provides important information such as the name and telephone number of the customer’s account for the payment contact, manager and executive. The form should also have a minimum of two business references and bank references. A key administrative person (in smaller companies this is usually Office Manager) is entrusted with the responsibility to get the information form, verify references and indicates the maximum amount based on the results.
6. Set a credit limit for each customer, large or small
by Credit references have been checked, the credit limit is ambient for each customer. For small customers, the limit should be set on the basis of mid-level to show the maximum payment. For large companies, credit should be set based on the amount of risk the company is willing to take, and is a direct reflection of the proportion of the company that you are willing to devote to one customer. Typically, the focus of 10% of your business one customer goes to a stop; 30-50% is very risky and over 50% is a potential disaster for your business. Bad things can happen to large companies as well.
7. Monitor Receivables Aging of total clearance and customer
At least weekly, calculating the average age of outstanding accounts by customer and total. Assign responsibility (eg National Audit Office Manager), for example, and reporting on this information. Develop a “timely” report that shows each invoice 5 days or more prior terms. Set specific, realistic goals based on industry for the “Average Days receivables” and put one part of the benefit package Office to achieve the goal.
8. Develop a standard Action Process for overdue accounts
develop a formal, written collection procedures including script or instructions for contacting customers who have outstanding, overdue accounts. The approach is always polite but increasingly companies that overdue time increases. Usually, the first call is polite inquiry only. At 60 days, they may be reminded of the terms of the Company and their credit is in danger, 90 days after their bill will revert to COD and 100 days of proceedings can continue unless payment is received immediately. If the last level is reached, you should be prepared to follow through instead.
9. Avoid Early dunning use your
dunning, overdue notices and account statements that suggest an overdue account usually do nothing but irritate responsible customers who may have a reasonable explanation for the slow payment. Instead, it is desirable to have your person responsible for accounts receivable telephone bills the client for payment agent (on loan application) to ask whether the account has been misplaced or there is some other problem. Typically, 80% of slow payments are resolved in this way and rapport is created between key employees of both companies.
10. Use Discount Payment Wisely, if at all
Offer early payment discount does not always produce the desired results. If the customer’s problem is cash flow, they will be unable to take the discount. Often customers already pay on time will take advantage of the discount. Can you rationalize this as a reward for good customers, but you’ve just reduced the overall profitability as a result. Discounts are attractive to customers typically do not produce favorable against the time value of money for your business. Better poll slow customers pay first and themselves, to determine the potential value discounting could be your cash flow.
11. Use your accounting system to help Manage Credit and Trade
Many small businesses use a simplified accounting system such as QuickBooks or Peachtree and these systems are able to reduce the amount of time needed for accounts receivable management. Credit Limit can put customers and the system will issue a warning message to the entry of a new order that should cause the limit to be exceeded. Aging reports from clients can be generated in a variety of formats. Data can be exported directly to Excel spreadsheet and further analysis if desired. Invoice data can also be directly transferred to the client by fax or e-mail saving considerable time. Existing customer contacts and phone numbers are in the customer records and can be quickly extracted and used in reports screen to assist in the collection calls. Be sure you’re using all the features of the accounting system to help your efforts in the management of credit and accounts receivable.