How To Get What's Coming to You

By Chris Freeburn

The key to maximizing the success of any business, big or small, is to maximize the amount of cash coming in, while minimizing the amount going out. That means making sure you are collecting as much revenue from customers as you can, while saving every penny possible on purchases made from suppliers. For a big business, this maximize/minimize strategy can boost profits, for a small business it can mean the difference between success and bankruptcy.



Make it easy
The best way to encourage prompt payment from your customers is to make payment as convenient as possible. That means offering them a variety of ways to pay. "Every customer is different," says Dave Bowman of TTG Consulting, a Los Angeles based consulting firm. "Each customer has his or her own unique financial situation and, depending on that situation, may prefer one method of payment over others." If you accept a broad array of payment options, you drastically increase the chances of both making the sale and getting paid quickly.

With credit and debit cards now the dominant payment that customers - both individuals and small businesses prefer to use when purchasing goods or services, accepting plastic is rapidly becoming almost a necessity. Credit and debit card issuers are eager to have their cards accepted as widely as possible, which means that it has become extremely easy for even the smallest businesses to obtain merchant accounts and credit and debit card processing equipment. Still, when choosing a merchant account, it helps to shop around and compare offers to get the best deal. Increasingly, consumers are using online bank transfers and wire transfers to pay for purchases in addition to credit cards. Most merchant accounts can be set up to accept these quick forms of payment in addition to credit and debit cards. Technology is quickly increasing the payment method options available to customers. "It's important for any small business to keep up with the latest popular options," Bowman says.

Discounts for early payment
One way to encourage early payment is to offer an incentive to the customer. Try offering a small discount say, one or two percent - off the total amount of the bill, if the bill is paid within a specified period after the invoice is sent. The period should be long enough to permit delivery of the invoice and a prompt response. Ten days is normally enough. "Providing incentives is a great way to motivate customers," says Bowman. "If you make early payment something that's in their own financial interest, they are more likely to take the hint."

Impose late fees
An alternative method is to impose a late fee, either in a specified amount, or in terms of a small percentage of the overall bill, for payment received after a specified amount of time. The amount of time after which the customer incurs a late fee must be reasonable, otherwise you will risk alienating customers who are struggling to meet their own bills. Late fees should begin at least 30 days from the date of the invoice.
Make sure that your company's late fee policy is noted clearly and prominently on the invoice, and that your sales people mention it when closing the sale. The customer must be aware of the policy for it to have the intended effect. Customers who were unaware of the policy will not be pleased if hit with unexpected penalties. "Nothing will irritate a customer more than being hit with a late fee without clear warning," warns John Tschohl, president of the Service Quality Institute. "If the customer doesn't believe he or she was fairly warned about the policy, that late fee could cost you future business."

Communicate with customers
Your customers have their own problems to worry about. Sometimes bills get misplaced or forgotten by busy people. Before taking any punitive action, beyond any late fees already spelled out on the invoice, over a serious late payment, take the time to send out a letter reminding the customer of the overdue payment and requesting quick payment. Be sure to include a copy of the original invoice, the date it was sent, the amount due, and any policies your company has regarding late payments. Be professional and non-threatening. Even good customers are sometimes late. However, advise the customer that continued failure to pay his or her bill will result in further action, including the possibility that you will send the account to collection. The potential damage to their credit rating may prove sufficient to motivate them to pay.

Debt Collection
If all other efforts fail to induce late or non-paying customers to finally pony up, you can always hire a collection agency, or pursue a case in your local courts. In general, you should wait at least 90 days after the account was due, and only after several attempts to reach the customer by telephone and letter, before engaging a collection agency.
Sending an unpaid bill to a debt collection agency should be the very last option, short of initiating legal action against the non-paying customer. Debt collection agencies usually charge a percentage of any money recovered - normally 15-35%, depending on the agency and the size of the debt. Recognize that any account that is sent to a collection agency is very likely the last business you will do with that customer.

If the collection agency fails to obtain payment, you can consider hiring a lawyer and suing for the unpaid bills. However, given the expense involved, this option should only be pursued in the event of a large outstanding account balance and only if you believe there is a good chance of repayment.

Reducing your payments
If it is important to consider selling merchandise to your customers as building a relationship with them, then it is equally important for a small business owner to consider purchasing as forming comparably valuable relationships with your suppliers. Keep in mind that your suppliers have their own pressures and concerns so see if you can address those when negotiating a purchase. For example, many products have a "slow selling" period. If you know what periods are slow months for your suppliers, you may be able to negotiate a lower purchase price, or more lenient credit terms, for items purchased during this period. By helping the supplier move product during a slow period, you may increase the supplier's good will toward you and your business.

You should establish a payment system through which payments for purchased supplies will be received on time, but not unnecessarily early. This keeps your cash in your account for as long as possible. Try to avoid late payments, since they will only prove as annoying to your supplier as late payments from your customers are to you. If the supplier offers discounts for early payment, you should avail yourself of the opportunity. Doing so will save money and build up your credit worthiness with the supplier for times when you may need to buy on credit.

When considering discounts offered by suppliers, you should refrain from buying more than you think you will need, even if the discount is particularly good, or the credit terms are especially lenient. Purchasing discounts will do you little good if you end up with more product than you can sell.

It is useful to cultivate as diverse an array of suppliers as possible in order to obtain the best prices and terms, and to protect against the sudden loss of a supplier.

Similar Content