Only 50% of small businesses survive past their fifth year. This statistic should not discourage entrepreneurs from starting their own business, however. Business failure is not wholly representative of a bad product, a bad market, or a bad business plan. Instead, it comes down to cash flow. If your business makes $10,000 in monthly sales but doesn’t see that money for 30 to 60 to 90 days after the sale, you are at risk of business failure.
Eagle Eye: How Do You Manage Your Receivables
Receivables management sounds like a big term, but what it comes down to is money in and money out. Proper receivables management means having the cash flow to support making more sales. Having poor cash flow might lead to turning down sales of larger volumes due to the supply cost.
Credit terms are killer for small businesses that do not have the pockets or cash reserve that large companies do. A Hackett Group study showed that large corporations are extending their credit terms as a method of receivables management, playing their advantage of large market share that small businesses cannot afford.
- Set Payment Terms
- Monitor Credit Limit
- Maintain Contact
- Stop Supply
Set Payment Terms
The first step to managing receivables is setting payment terms with your customer and your supplier. 46% of business invoices are past due. How long can you afford to wait to be paid?
Monitor Credit Limit
Set the initial credit limit low and increase it over time. Use business credit reporting agencies like Experian or D&B. Ask for trade references. Be wary of concentrating your extended credit to a single company. If that company is insolvent, you may follow.
Call to verify they received the goods and the invoice. Confirm all account information and contact details. When the payment is due and they have yet to pay, follow up. You won’t get paid if you don’t ask for it. If your customer is struggling to pay their debts, calling and asking is more likely to result in payment than waiting.
If your customer still does not pay, stop all future supply. Waiting for payment before extending further credit serves to prevent the situation from growing worse. If your customer is willing, establish a payment plan to recover past due payments. This will be cheaper than hiring a collection agency. If you cannot agree upon a payment plan, a collection agency may be able to recover a small amount of the debt.