Payment times for small businesses have fallen to a three-year low, based on a Xero analysis of invoices with 30-day terms. If you don’t focus on beating the benchmarks in Xero Small Business Insights, poor cash collection could constrain your growth more than that of your competitors.
Developing strategies to get paid faster is one of the of the most effective ways to increase cash, which you can then use to grow your business, or spend on a well deserved holiday.
Here are five things we at Sequel CFO recommend to help beat the benchmark.
1. Introduce new revenue lines
Do you have that strategy in the back of your mind that would bring in a new product or service? Have you thought about how to turn that idea into reality, and maybe bring in new cash with no payment terms (the best cash flow structure)? Or better yet, payment in advance? Creating a mix of revenue lines reduces risk in your business, can increase its value and help you sleep better at night knowing there’s cash coming in.
Less Exciting Things
2. Change your contract terms
How often do you just start working without a signed contract? Without a signature and standard terms and conditions, you can be fighting with one hand tied behind your back when it comes to collecting overdue payments.
3. Use credit applications and enforce credit terms
Often we let good customers delay their payments when we want their business. But if your customer really values you, they should prioritise paying you. Don’t be afraid to use collection steps (including discontinuing service) if customers breach their terms. Your bank wouldn’t hesitate, so why should you?
4. Once a week, review your aged debtor listing (an easy report to call up in Xero) and look for errors. You can’t know whether you are beating the benchmark if your data is wrong. Look for:
a) Negative amounts. This could mean credit notes have been applied to the wrong invoices. Ask your accounting team to fix these if you know they’re wrong.
b) 60+ and 90+ day accounts are a sign a debt has turned bad. Get on the phone and call these customers. If you need to write the debt off, do it (and maybe get a tax deduction!)
5. Nail your invoicing approval process
An easy way to get paid on time is to make sure your invoice is correct. An error can cause you to miss your customer’s payment cycle while you amend an invoice or issue a credit note. This is a tactic big companies employ, despite their commitments to pay SMEs sooner.
Credit reports can give you a sense of how risky a potential customer is and how reliably they pay their bills. You’ll be able to set your payment terms accordingly. This is an excellent guide from Xero.
Businesses that monitor their financial performance and partner with accountants, CFOs and advisors to improve their performance will be perfectly positioned to make the most of new information like Xero Small Business Insights.
This page contains general information only from Sequel CFO and should not be taken as taxation, financial, investment or legal advice from Xero. Xero recommends readers always obtain specific and detailed professional advice about any business decisions.