How to: get paid faster

• Bernard Tanner
• 28 February 2010
• Page 1 of 2 : single page

Photo credit: photolibrary.com

Entrepreneurs love making a sale. There's all the thrill of the chase - hunting down prospects, crafting the perfect pitch or marketing campaign - then sealing the deal. After that, it's off to the next challenge. The faster your customers pay you, the better your cash flow and the less capital you need to invest in your business. So how can you make payday come early? The Commonwealth Bank's Bernard Tanner shares some practical tips. 

A sale's not really a sale until the money's in the bank. That's where small businesses sometimes fall down.

Remember, if you sell on credit, the longer it takes you to get paid by your customers, the more cash you need to put into your business to keep it running while you wait. That cash comes at a cost.

If you're using borrowed money, you have to pay interest on it. If you're using your own money, then it's now unavailable for other purposes, like earning interest, buying shares or paying yourself. (That's what's known as an opportunity cost.)

So if you're in business, you need to be obsessive about getting your customers to pay up as soon as possible. Here are some ideas that can help.

1. Invoice early, then follow up

Let's start with the basics. The first step is to invoice at the first possible moment, keeping your payment terms as short as possible. Then, rapidly follow up any clients who don't pay on time. That may seem obvious, but it's surprising how many businesses don't do it consistently.

'A sale's not really a sale until the money's in the bank - that's where small businesses sometimes fall down'

There's something about the entrepreneurial personality that doesn't like paperwork. That's why you need a dedicated staff member whose top priority is to keep the cash flowing in. If there's no one on your team who fits the bill, it can be worth hiring a freelance bookkeeper or accounts clerk to come in for a few hours every week.

Here are some other pointers to help knock your invoicing systems into shape:

• The easier it is to produce an invoice, the more likely you are to get it done on time. It's worth investing in software that generates invoices directly from the job information already in the system.
• Negotiate shorter terms of trade with key customers, and make sure they understand what your terms are and why. If possible, ask for payment on delivery or within seven days. Most customers will be understanding if you explain that prompt payment is essential for the ongoing health of your business.
• Of course, big companies and government departments have their own standard terms, without the flexibility to change them just for you. In that case, make sure you understand their payment cycles and bill accordingly - otherwise you could find yourself waiting an extra 30 days or more.
• Since December 2008, Commonwealth Government agencies have been required to pay invoices on contracts up to $1 million within 30 days. If they don't, you can charge penalty interest. Visit business.gov.au/BusinessResources/pages/Calculationoflatepaymentinterest.aspx.
• Sometimes sending an invoice is just the start. You also need to ensure the right person is alerted when an invoice isn't paid on time and that they follow it up. That means a written procedure and checklist, with scripts or templates for each stage in the process: first, a friendly reminder call; next, a more formal letter or email; finally, a legal letter if things are seriously behind schedule.

2. Track ‘days sales outstanding'

As management guru Peter Drucker liked to say: "What's measured improves." So, if you want to improve your receivables performance, you have to start measuring it.

The key number here is something called ‘days sales outstanding' (also known as ‘debtor days' or ‘accounts receivable days').

You start by calculating your average daily credit sales over a given period.

So, if you made $547,500 in credit sales over the last year, your average daily credit sales would look like Table 1. (Calendar days are used for the purpose of this example. You may substitute with business days depending on the nature of your payment cycle and business operations.)

Next, take your trade debtors at the end of the period (the amount customers currently owe you) and divide it by your average daily credit sales to find out how many days worth of sales are still outstanding.

So, if you have $60,000 sitting in accounts receivable, your calculation would look like Table 2. Bad news if your terms are 14 days.

In fact, you're more likely than not to find your days sales outstanding exceeds your standard terms. That's the common experience of many businesses. And, if you track it over time (recalculating it at the end of every month, for example), you might find some interesting patterns emerging.

Most importantly, you can see whether the steps you've taken to get paid faster are working - and redouble your efforts if they are not.

3. Make it easy for people to pay

The easier you make it for your customers to pay, the more likely they are to pay you on time. That means offering a wide range of electronic payment options.

Nowadays, it doesn't have to be expensive or difficult to process card payments. A web-based virtual terminal, like the Commonwealth Bank's eVolve, can be a very cost-effective solution for smaller businesses, even allowing you to log in to the system and process payments when you're on the move.

The other big advantage of all these options is that they put money in your bank account faster.

4. Offer an earlybird discount

Let's say it takes your clients an average of 60 days to pay you. Now imagine that you could cut that figure to just seven days by offering a 5% earlybird payment discount. You're effectively paying 5% of each invoice for the privilege of having the use of your money for an extra 53 days. Worked out over the year, that's like borrowing money at an annual interest rate of 34%!

Any earlybird discount has to be carefully worked in to your pricing, rather than just taken off the top. In effect, you charge your other customers an extra 5% for paying late, while rebating those who pay on time.

5. Get paid upfront

It might seem an impossible dream. But it's standard practice in many businesses - and after a little negotiation, you may be able to introduce it in yours. Here are some of the ways you can get paid upfront:

• Ask for a retainer. This can be a good solution for almost any kind of services business, from accountants to IT support, even home and garden maintenance firms who have large contracts with estate agents or strata units. As an incentive, consider offering some extra, value-added service to the package. It could be something as simple as an online or email newsletter with tips and advice in your area. 
• Charge progress payments. Builders and tradesmen often charge progress payments for larger jobs, and this approach can also be applied in other businesses.
• Sell on subscription. A subscription model gives you regular, reliable cash flow that can help you cover your fixed costs, before adding other services on top. You may even be able to bill your customers by direct debit, making the whole process fast, automatic and pain free.

Consider receivables finance

If you have an established pool of large customers with good credit, then another way of getting paid upfront is to use receivables finance. Receivables finance is like a short-term bank loan that helps you turn accounts receivable into cash, by accessing most of the value of an invoice at the time you send it, rather than waiting for your client to pay.
It works a little like a line of credit, except it uses invoices as security.