Mike has mentored over 1000 entrepreneurs personally - and often the same sorts of problems crop up. Hence "Ask Mike" - your business, entrepreneurship and growth questions answered! Email your question to firstname.lastname@example.org
In the early stages of a business, the idea of chasing up invoices is a delicious prospect. It means you have jumped lots of hurdles successfully: you have made a sale, done some work to a customer's satisfaction, and sent a bill. Good job!
In reality, pursuing payments can be time-consuming, stressful, and, in any case, something we are not all necessarily good at.
But without rigorous processes for chasing up, your business will get into trouble; for two reasons:
1) Failing to extract payment is absolutely the worst possible outcome. It is worse than not making sales; because you have done the work, made the outlay, and not received any money for your efforts.
2) Furthermore, late payment means poor cash flow. Ask any business to identify the main threat to their existence and cash flow will be the top response. Poor cash flow stifles growth, saps goodwill with suppliers, and sucks up resources.
So, if cash flow is your biggest problem, and your customers' irregular payments the biggest contributor; what can you do about it?
Well, good credit management begins right back at the point a sale is made. You have had a great meeting, secured the sale and agreed on a price; so why stop there? This is the ideal time to bring up payment terms. Agreeing these terms alongside the deliverables allows you to:
- Cover the issue early, using the positive currency your meeting has generated to smooth over the 'embarrassment factor'
- Include payment terms overtly in any written agreement
- Use payment terms as a bargaining tool. Play the small business card: would the client consider paying a little earlier; or using staged payments? Could you incentivise them with a reduced rate for predictable or upfront payments?
Larger clients will also see you pitted against the infamous Purchasing Department - whose job is generally to make life as uncomfortable for small businesses as possible.
Here, you need to convert your client into an advocate. Your client will hold more sway with their own purchasing department than you can ever hope for. So give them some ammunition with which to fight your corner - a small discount, a benefit on a future deal etc.
If all of that sounds like hard work, it is no surprise. The vast majority of the entrepreneurs I have mentored are ideas-people, or operations specialists. Very few are finance people.
Indeed, 70% of late or non-payments are actually due to basic data errors in invoices - just the sort of thing entrepreneurs are hopeless at focusing on.
Good insight as to the value of any discounting you offer, how to chase your debtors, and when to fight or walk away, will all come in the form of your first - and quite possibly most valuable - employee/contractor. A bookkeeper will, in all likelihood, pay for themselves before they have sent you their first (prompt and immaculately filled out) invoice.
This is not to say that you can simply pick up a Yellow Pages and flick to 'B'. Go on recommendation, and find someone who is prepared to take the time to understand your business.
Now then: back to the sale we have just made. With terms agreed, ram home the point with the help of your new employee. Follow up with an email, drafted by your bookkeeper, covering all the details while they are still fresh in both parties' minds - and before you start any work. It will remove any chance of disputes later on.
Besides, if disputes do crop up, you now have a specialist on hand: a bookkeeper who talks the same language as the client's Accounts Department. Negotiations now run through two middle men (or, of course, women) who not only speak the same language but interact with a vital degree of separation, on 'my boss did some business with your boss' terms. You have moved from a situation where payment conversations were awkward, frustrating and largely after-the-event; to an amicable, co-operative, pre-emptive dialogue. These people actuallyenjoytalking money with each other.
As entrepreneurs, we often feel like we have to be experts in everything; which results in our becoming a jack of all trades and master of none. You cannot do everything. Get a professional in early. These people are experts in their field and will prove their worth tenfold by dealing with your invoices before they ever become an issue. That leaves you free to do more important and enjoyable things: devising products, selling, and doing the job.