We like to talk a lot about the three freedoms all business owners want, and how we can help you achieve all three: financial, time, and mind freedom.
Mind freedom means less work-related stress.
This could mean finally getting a good night’s sleep without tossing and turning thinking about work.
It could mean having more patience and headspace to enjoy your family.
Time freedom means having enough time to do the things you love outside of your business.
This could mean surfing when the swell is good, coaching your kids’ sports teams, or having three-day weekends.
Financial freedom means having the discretionary income to enjoy the lifestyle of your choice.
This could be living in a nice new house on the waterfront, buying a new car, taking family holidays regularly, or having a decent nest egg to retire with.
In reality, all three freedoms work together to provide you a better, healthier lifestyle.
Getting paid faster will help you achieve more freedom.
If you have strong debtor processes in place, you’ll save time previously spent following up slow payers.
You’ll be less stressed and no longer wondering how you’re going to pay an invoice that’s overdue and incurring late penalties.
And, you’ll have more cash in the bank - offering better options to improve or grow your business and achieve your financial goals.
There are generally seven key causes of poor cashflow…..
An inadequate accounts receivable process.
An underutilised accounts payable process.
An inefficient inventory process.
An inappropriate debt / capital structure.
Overheads are too high.
Gross profit margin is too low.
Sales are too low.
By working with us to help you address each or some of these causes, you’ll be able to free up as much cash as possible.
We can help you address each of these, but today we’re just going to focus on the first one - your accounts receivable, or debtors, process.
Just in case I’m using too much Accountanese, to break it down simply; debtors is just another word for accounts receivable or people who owe you money.
Let me know at any point if I use too much Accountanese and start losing you - I’ll do my best to explain everything as simply as possible as this stuff is really important to understand.
If you think one of the other causes may be more relevant to your business, let us know in the feedback at the end and we can let you know how we can help.
Let’s have a look at the impact slow-paying customers have on your cashflow.
This is an example of a Cash Conversion Cycle.
Of course, yours might look a bit different depending on the type of business you have.
For example, if you’re a service-based business, like a solicitor or a hairdresser, you’d have work in progress rather than stock.
The theory behind it is the same.
No matter what type of business you have though - the aim is to shorten your Cash Conversion Cycle to free up cash.
– so basically get paid quicker and have more cash in your business than being owed it.
In this example, the business buys stock from its supplier and pays for it 35 days later.
On average, it takes 65 days for the stock to be sold to customers
And then it takes another 45 days for the customers to pay.
This means that it takes 110 days from when the stock is bought from the supplier to when the business receives money from its customers.
To calculate the Cash Conversion Cycle, we add the average stockholding of 65 days the average receivables (money in) of 45 days and take off the payable days of 35, as the cash is still in our bank account for those days.
This means the business’s cash is tied up in its stock and debtors for 75 days.
This delay means the company must have additional money available to cover expenses until it receives the cash from its customers.
Let’s say this business has annual sales of $500,000.
If they don’t do anything to resolve their debtors process, and their average receivable blows out to 55 days, that’s about an additional $13,700 of cash that’s tied up in their debtors and unavailable to be used to pay their own bills.
However, if they put in place a strong debtors process and reduce their receivable days by 10, that frees up $13,700 of cash.
Can you see how getting paid faster means more cash in your bank account?
So, what does a strong debtors system look like?
Setting your expectations with customers from the start of the relationship is easier when you have a clear, documented process that’s followed every time.
We’re going to look at best practice which involves documenting your system for consistency and clarity, setting robust Terms of Trade, using guides and scripts, and utilising third party credit control services.
If you don’t already have a written debtors process, this should be your first action following this event.
A systemised process details your expectations of your customers, and when and how your team should respond to ensure expectations are met.
This provides clarity for your team and ensures customers are followed up in a timely and consistent manner, which will drive better payment habits.
You need to document things like:
How quickly you invoice your customers
How long the customer has to pay after receiving their invoice,
What happens if they don’t pay in time.
The sooner you bill the client, the sooner you get paid, so make a conscious decision to invoice fast when the customer has the transaction fresh in their mind and is more likely to pay quickly.
If your invoices allow payment by the 20th of the following month, you need to change this.
Consider requesting payment within 7 days of the invoice.
As a customer yourself, if you receive an invoice and it’s not due for 6 weeks, you’re likely to put it aside and pay later, right?
In fact, you’ll probably forget about paying it until you get a reminder that it’s overdue.
If an invoice is due within 7 days, you’re more likely to pay straight away, so you don’t have to think about it again.
These payment terms should be clearly set out in your debtor's process.
Also, do you make it as easy as possible for customers to pay you?
For example, can your customers click a link on their invoice to pay online?
What payment options do you offer?
Do customers pay a deposit?
Can they set up regular payments?
Best practice will be different for each business.
The key is to consider all options relevant to your business and make it easy for customers to pay.
You also need to be clear on your follow-up process.
Do you wait until your debtors are a week overdue before you follow them up, or do you just follow all overdue debtors up once a month?
Ideally, send a reminder the day the invoice becomes overdue, requesting immediate payment.
Your process should set out how often debtors are followed up and the follow-up method - this could be by automated email, personalised email, text, or phone call.
You should also record all contact with debtors, including the time and date, contact method, and the outcome of the contact, for example, that the customer agreed to pay X amount today, with the balance to be paid over the next six weeks.
Whether you use a cloud-based Customer Relationship Management system or a spreadsheet, you need a standardised method of recording this information.
And use the tools in your online Accounting solution to help you set up automatic reminders etc.
Don’t know how to do these things?
Ask us, and we’ll help you.
Finally, if you’ve exhausted all avenues and the customer still hasn’t paid, it’s time to refer them to an external debt collection agency.
They’ll be able to chase up the customer for payment to save you the time, energy and stress.
Terms of Trade are essential to have if you’re providing goods or services to customers on credit.
These need to be accepted by the customer before you provide them with the product or service and you should both retain a signed copy.
The terms you include will depend on the nature of your business.
For some, a short list of terms is sufficient.
For others, it could be a multi-page document setting out detailed terms.
These are some key terms that all businesses should include in their Terms of Trade:
You must define and include your payment terms.
Be clear on how long after invoicing the customer has to pay
How do they pay?
Do they need to pay a portion upfront and then the rest on completion?
Whatever your payment terms are, they need to be clearly set out.
You also need to detail what your debt collection process is.
Upon laying out the expectations for payment with the customer from the start, what do you do when their payment does become overdue?
Lastly, you must clarify in your Terms of Trade who covers the various costs incurred in the instance of late payment.
For example,
if you don’t have a clause stating that the customer will be liable for the cost of debt collection, then you’ll end up footing the bill.
You can only charge interest on late payments if this is clearly stated in your Terms of Trade.
You may charge an administration fee to cover the extra resources used to follow up overdue payments; but only if this is clearly stated in your Terms of Trade.
Before one unleashes the inner rottweiler, it’s important to apply some empathy.
The last few years have been rough on everybody, we never know what could be happening in someone’s personal life, and issues are more likely to be resolved when we act with empathy.
Consider how loyal the customer has been to you in the past.
Are they a regular customer who’s paid on time in the past?
If so, more leniency may be justified to preserve the relationship you have with them.
Seek first to understand and then to be understood.
Ask them how they’re going.
As a fellow business owner, you can probably relate to the stress the owner might be facing.
Maybe they’re waiting for a big customer to pay them, so they have the money to pay you.
Maybe their office manager has left and they’re in the process of recruiting and training someone else.
Asking how they’re going will give you insight into potential causes for their late payment and will help you identify the following steps to take.
This leads into our next point of giving some payment flexibility.
The goal is to get paid.
The sooner the better, but ultimately, you want to be paid the full amount and avoid having to write it off as bad debt.
Consider offering options; perhaps asking for a portion of the payment immediately, with the balance paid off over time.
You still need to be firm about expecting payment by the agreed date.
So, ask the customer to get in touch immediately if they are unable to meet the agreed payment terms, so you can discuss alternatives.
Having backbone and heart is key to balancing your expectations around getting paid and the relationship with your customers.
You need to have a backbone and stand up to excuses.
There may be legitimate reasons for the late payment; however, you’re running a business and have your own bills to pay, so you need your customers to pay you.
It is okay to ask for payment and be firm that the customer must pay.
But you also need to have a heart and come from a place of care when dealing with customers.
Actively listen to your customer, then discuss your purpose statement: if you don’t get paid, you can’t achieve your purpose.
Consider all options for payment.
Can you be a bit more flexible for some customers?
Be considerate in your approach and tailor your response to each customer’s circumstances.
All that said, talking to customers about overdue payments can be awkward and uncomfortable for many people.
That’s why we’ve put together scripts to help guide these conversations with customers.
These scripts help you discuss payment with customers with empathy while also firmly requesting that action be taken.
We also have a Credit Management Guide that helps you manage your accounts receivable and focus on key processes to reduce your business’s exposure to risk.
We’re happy to share the scripts and guide with you at no cost on the back of this event, just let us know in the feedback form.
Show your clients what’s in there - just enough for them to see the value.
Another option to consider, particularly for those of you who do find these conversations uncomfortable, is to outsource your credit management.
It frees up your time to work on more important things in your business and reduces the stress you face chasing up overdue payments.
Outsourcing appropriate things is best practice for most businesses.
It’s essential that you build a relationship with your chosen provider so they can understand your core values, your style of communication and the language you use.
You don’t want to use a provider who goes straight in there with all guns blazing and ruins any chance of a future relationship with the customer.
Be clear on your expectations and check in to ensure they’re being met.
Outsourcing can be a great option; however, it’s not an ambulance at the bottom of the cliff.
You can’t expect them to fix your customers’ existing bad payment habits on their own – expecting this could cause brand damage for you and the credit controller, not to mention waste a lot of time.
That’s why we’ve developed resources to help you.
No matter which option you choose, the important thing is to have the systems in place in your business to ensure you get paid as quickly as possible while retaining strong customer relationships.
Hopefully you’ve found the information in today’s event valuable.
The key is to ensure you go away and take action.
You don’t need to try to do it all at once.
Simply focus on small steps you can take to improve your systems and processes to get paid faster.
And ask us to help you if you're unsure of where to start.
The first thing to do is calculate your cash conversion cycle so you know how long your cash is tied up in your inventory and debtors, and understand the impact late payments will have on your cash flow.
Then, have a look at your current debtors process.
If you don’t have one yet, make this a priority.
Review your entire process as it’s written and compare that to what actually happens in your business.
It’s likely that over time, the process has evolved but the documentation hasn’t been updated.
Or maybe steps are regularly being skipped.
Make sure it’s up to date and share it with relevant team members to ensure they understand their role in the process.
Perhaps provide everyone with a checklist to step through with each customer.
There are great free tools like Trello that can help with process management.
Review your Terms of Trade and make sure all relevant clauses have been included and written clearly.
Ensure you have a process to obtain a signed copy before providing the product or service on credit.
We do have templates we can provide you if you need help with this.
Start using scripts during conversations with clients about late payments.
You can use ours as a starting point and update them to reflect your business and tone.
This helps to build confidence and also ensures consistency across team members.
Last, but by no means least, outsource your credit management where you can to free up your time and reduce your stress levels.
Whatever you do, don’t keep working for customers who don’t pay - you are running a business and right now you need to reduce risk wherever you can.
It’s essential that you decide what you’re going to commit to doing.
The sooner you take action, the sooner you can free up cash in your business by getting paid faster.
Make a plan for how you’ll implement what we’ve discussed today.
Part of that planning is to surround yourself with experts and we are here to help you.
Remember to focus on what you can do, not on what you didn’t do in the past.
Briefly explain what is involved in each of the options and the benefits to the client if you support them in this way.
As well as being able to provide you with complimentary copies of our scripts, guides, and templates, we’re here to help you get paid faster.
For those of you who want to reduce your cash conversion cycle and free up cash, our 90-minute Cashflow & Profit Improvement Meeting is a great option.
We’ll identify 1-2 strategies you can implement to improve your cash and your profit.
We can focus this meeting on strategies to get paid faster, or if there’s a more pressing issue in your business, we can focus on that.
We’ll send you pre-work to identify exactly where you need the most help.
If you don’t have a Cashflow Forecast for your business, we can prepare one for you so you can plan for cash inflows and outflows.
And if you need ongoing support and accountability to implement new strategies in your business, our Cashflow Management Coaching programme is a great investment
If you’re unsure exactly where to start, we’d love to meet with you for a complimentary meeting to discuss how we can best support you.
Whether you’re looking for more money, more time, or less stress, we can help you achieve this freedom.
Thanks for making the time to attend this event.
We appreciate that your time is very valuable.
We hope we’ve given you plenty of ideas to think about and some clear options for how we can support you to get paid faster.
Before we go, I thought I’d share this quote with you … (read quote)
Let’s make sure we approach our own cashflow challenges with empathy and use creativity to solve problems that may arise.