Small business insights — CASH IS KING

Jacqui Logan.

The expression “Cash is King” might sound a bit trite but, for small businesses, it is a vital mantra that many live by.

As an employee, I never work for free and sometimes I even get paid not to work. When I’m on annual leave I still get paid. If a client doesn’t pay their bill, I still get paid.

In contrast, for business owners, getting paid isn’t always so straight forward. At some stage or another they’ll be scraping together cash to pay staff and settle bills.

Even those who can meet immediate cashflow demands are desperately building up cash reserves — to insulate them from the economic cycle, the whims of banks and other lenders, and to ensure they aren’t caught short when large opportunities turn up.

There are many tools that our local businesses are still not taking advantage of to improve cashflow. Here are some simple ideas to help you set up a clever but polite invoicing strategy using your accounting system.

Online InvoicingBe taken seriously and create professional-looking invoices. Most accounting systems will provide customisable invoices to save time, along with online invoicing so that you can eliminate many of the delays and barriers to payment.

Sending invoices electronically takes you a step closer to a paperless office but also some systems have a nifty feature that automatically updates when your bill is opened by the customer.

Run credit checksAs a business owner, you will be able to access business credit scores through some accounting software. For instance, Xero software will show you business credit scores according to Equifax — a global credit scoring company.

Reduce your payment due datesClose to 75 percent of invoices ask for payment within two weeks, so expectations are changing. Why not experiment with changing your invoicing payment terms by a few days?

Long payment terms are a throwback to the days of snail mail and payment by cheque. Businesses now send invoices electronically and most payment is made online, making 30-day terms obsolete.

Yes, invoices with short payment terms are more likely to go past their due date, BUT you still get your money sooner! The statistics below speak for themselves.

Consider DiscountsRemind clients of penalties for late payment and let them know exactly how much more it will cost if the payment isn’t received on time. Often a more effective approach is to offer a small discount for early payment. This sounds more positive and your clients are likely to respond more quickly.

Break large jobs into smaller invoicesAsk for deposits up front or payment part-way through — it’s a reasonable request. That way, if your customer runs into financial problems part way through the project, you won’t lose everything they owe you.

Offer different payment optionsThe goal is to make it easy for your clients to pay you, so consider accepting credit card or offering payment gateways such as PayPal.

Get your money up to 30 percent sooner just by offering a convenient payment method. It’s simple to add a “Pay now” option to online invoices.

Encouraging clients to pay by direct debit is also recommended. Payment is triggered as soon as you send the bill. There aren’t many providers doing direct debit for small business just yet, but that’s changing.

Invoice immediately – Go mobileWhy wait until you’re back in the office? You can generate bills when visiting clients or out on the road. However, whether you’re on the road or in the office, the same rule applies. The sooner you invoice your client, the sooner you’ll receive payment.

Send remindersIt can help to send a friendly reminder when payment is due. Set up your accounting software to send out invoice reminders automatically at specific dates and times with various messages, from polite reminders to more urgent requests. You don’t have to lift a finger.

Keep an eye on the ballKeep a close watch on your accounts receivable turnover. As receivables age, their quality goes down, so you should act sooner rather than later.

Run ageing reports on your accounts receivable, so you can see which of your clients are poor payers and who needs to be chased up. You can also consider adjusting your payment terms to suit each client depending on their history, which is kept within the accounting system. A trend can be viewed for each individual customer, allowing you to manage the payment approach of each client. This is where you may feel a need to change some customers’ payment terms.

Outsource what you don’t likeSome business owners tend to procrastinate, apologise or simply write off the debt, but why not consider outsourcing the job of chasing late payments? These services require very little intervention from you, apart from initial discussions to set rules and personalise the approach you want to take. The rest can be done by system automation and real people making contact and arrangement with your clients on your behalf.

Use a financing service to advance paymentsFor the 64 percent of small businesses routinely affected by late payments, this solution can be a lifesaver. Some finance companies will pay you up to 90 percent of the value of an invoice if you sign it over to them. By authorising read-only access to your cloud accounting system, a financing service can provide advance payments on unpaid invoices. You are likely to have a set amount of time, say 12 weeks to repay the advance, plus a small fee. You may be allowed to make weekly payback instalments instead of having to fork over one lump sum.

Following the rules above will help ensure that cash serves you, rather than the other way around. This might all seem like a lot to think about but, once your invoicing process is properly set up, it should run smoothly and without too much intervention.

If you would like to explore some of the above-mentioned options further, please contact BDO Gisborne on 06 869 1400 and ask to speak to our specialist information systems team. Alternatively come along to our “Walk in Wednesday” sessions and have all your questions answered one-on-one from 9am to 12pm at our office, 1 Peel Street, Gisborne.

Jacqui Logan is a qualified chartered accountant and information systems manager at BDO Gisborne — an independent member of BDO New Zealand and part of the global BDO network. See: www.bdo.nz