It’s a good bet that at some point in every entrepreneur’s life he or she has heard some variation on the saying, “Do what you love and the money will follow.” But what if the money doesn’t follow, or simply takes too long to arrive?
Invoicing clients and customers, and then getting paid in a timely manner, has long vexed small business owners. And yet managing accounts receivable is a critical aspect of any growing business. If this financial necessity is left unattended, it can cause serious cash flow problems.
Indeed, a study released last May by the Kauffman Foundation showed that customers paying late or not paying at all were two growing concerns for an increasing number of entrepreneurs. In 2008, at the height of the recession, just two percent of business owners surveyed said getting paid on time was their biggest business challenge. By the end of 2010 that number had grown to 14 percent. To help your company manage its accounts receivable with the least amount of angst, small business experts and owners offer these tips:
Set the terms
Denise O’Berry, a Tampa-based small business consultant and author of Small Business Cash Flow: Strategies for Making Your Business a Financial Success, says the key to getting paid on time begins with setting boundaries for customers and clients. “So many small business owners either don’t ask for any money up front when they’re starting a project or order, or send an invoice that doesn’t have a due date or any other payment terms,” she says. “You have to make it clear from the start what your expectations are and then speak up if they’re not being met.”
Zak Normandin started Little Duck Organics, a children’s snack food company, in 2010 out of the basement of his Brooklyn home. Today the company has nine employees who work from offices in a nearby warehouse. Although Little Duck’s products are now sold in about 6,000 retail outlets across the country, including Whole Foods, Normandin says he only invoices five or six different companies in any given month. “Grocery stores work through big distributors and those are the companies we are billing,” he explains.
Normandin says he expects payment within 30 days for most of his accounts. However, when one distributor told him that all new vendors had to wait 90 days for payment, Normandin balked. “I can’t run a new business and not get paid for three months,” he says. He explained the situation to his contact at the company and was able to get paid in a much shorter period of time. “It’s important to speak up so customers understand your situation,” he says. “Most people will be reasonable.”
Ask for a portion of your fee up front
Being a small business owner doesn’t mean you need to finance your customers’ orders. “Small service businesses often do the work and then bill the customer days or even weeks afterwards,” says O’Berry. “I advise people against that. You’re not their bank.” It’s not unreasonable, she says, to ask for anywhere from 30 percent to 50 percent of your total fee upfront before the work begins.
Alex Zaltsman, founder and CEO of Innovi Mobile, a firm that helps large companies develop their mobile technology, requires 50 percent of his company’s quoted fee to be paid before any work begins. “We won’t even start the job until we have this money,” he says. “This ensures that both my company and the client have some skin in the game.”
The guy or gal you shake hands with when you land that next big contract or order is most likely not the person who’s going to be cutting your check. That’s why it’s so important to get the name, phone number, and email address for your customer’s accounting staff.
“Unless it’s a very small company, the CEO of the firm you’re doing business with is not handling your invoice and most likely isn’t even thinking about it,” says John McAdam, author of The One Hour Business Plan Foundation and a small business consultant. “Getting to know the people in accounts payable department helps make sure your information is in their systems and that your invoices will get paid.”
Zaltsman says he always gets contact information for his clients’ accounting staff and calls the week before any final balance is due to make sure his company information is in their computer system. “If I don’t get a call back from the accounting department, I call our business contact at the company,” he adds. The point, he says, is to build a relationship with these people so that you become more than just another bill to be paid. “You want them to associate a person with the invoice.”
Skip the paper
With so many online payment systems—from QuickBooks to online invoicing services offered by many banks there’s little reason to use paper invoices, says O’Berry. “It slows everything down,” she says. When working with a new client, she advises calling the accounting department to make sure the billing information you have is correct and to let them know when you’ll be sending your invoice.
If your terms are to be paid within 30 days, McAdam recommends making a courtesy call right before that time to double check that your information—bank account number, business name, and address—is correct and in their computer system. “You would not believe how effective that is,” he says. It can mean the difference between your check going out the next day and your invoice just sitting in someone’s in-box, he adds.
Know when to walk away
As obvious as it may sound, O’Berry still finds herself occasionally advising clients to stop doing business with customers who simply don’t pay. “I’ll hear a business owner say that even though they haven’t been paid for the past few months, they’re hoping the next month will be different,” she says. “They’re afraid to walk away from the business. It’s just mind-boggling to me. When a customer doesn’t pay you, there is no business.”