There is no doubt that cash is key for every successful business and turning your sales into cash is not as easy as it might sound. A lot of businesses have customers that although regular and loyal are often slow in paying.
So, is there something that you can do to encourage your customers pay on time? Before getting into that, it will be useful to mention that the most important thing is to prevent being in such a situation rather than correcting it. How?
The first thing you should be doing before selling on credit is examining the credibility of your clients. Do you know your client well enough and do you know if his financial position is in line with the credit limit you gave him? Are you sure that your client is going to be able to pay you and pay you on time?
The second thing you should be doing is monitoring the credit limits your clients have against their current credit. Setting credit limits is not useful if you don’t monitor if your clients have exceeded these limits.
Suggestions for Encouraging Slow Paying Customers
Apart from the things that you can do to prevent having customers turning into bad debts, there are things that you can do to “motivate” or “push” your customers to pay on time. The following list is not exhaustive but it’s just to give you an idea of the most common things that businesses do.
- Offer Prompt Payment Discounts : You can set up something like a “scheme” where your customers will get a discount for paying on time. You’ll be surprised how motivating financial incentives like that can be!
- Better Credit Terms: You can also incentivize your customers by increasing their credit limit if they do not have any incident of late payment during the past months (6 months for example).
- Monitor the aging of your debtors: You should closely monitor your debtors and more specifically the aging profile of your debtors. To be more specific, by monitor the aging profile of your debtors you can identity balances that are due or in other words invoices that should have been already paid. This might not sound like an incentive but identifying that an invoice is overdue and contacting your client to politely ask for the payment is a proven working method.
- Invoicing Process: You have complete control of the invoicing process and prompt invoicing has been proven to be a highly effective way to turn your sales into cash. Every business should have a clear and effective invoicing process in place to make sure that services or products sold are invoiced on time. In addition, your invoices should clearly state the date that the invoice is due by and the ways that your client can make the payment.
You should always remember that making a sale is the first important step but not the only. Turning that sale into cash is equally important and ensuring slow paying customers are kept to a minimum is a critical step in working capital management.
Conclusion
These were just some of our thoughts and experience in this area of managing an important component of a firms working capital. If you have other ideas that have worked please drop us note or use the comments section below, so other can benefit from your experience.