- Original Poster
- #1
I thought I'd put my money where my mouth is and start a thread that's designed to give people an insight into risk managing their money. For the purposes of this particular thread I'm focussing purely on the management of clients and credit. This one is for stock based businesses although the credit management principles easily apply to service based businesses too. I'll add other threads later.
Stock based business cash flow management tips.
It really doesn't matter whether you choose to run a lifestyle business from home, or a Corporation with 30,000 sq ft or more of warehousing because the principles here remain the same.
Remember this mantra- cash is king. Without it you are dead in the water.
Firstly and before anything, you need to ensure that your credit terms are nailed down and sorted out. Make sure your terms and conditions have a "retention of ownership" clause in them for starters.
Keeping the money coming in is one of the hardest things that you will have to do in business and if you get your systems right at outset, you will save an awful lot of pain later on.
Many businesses get this wrong, and the result is very often the failure of the business so whatever you do, don't skimp on this part. You can be making huge margins on paper, but if you can't pay your suppliers, again, you're dead in the water.
Spend some time working out what kind of payment terms (if any) you're going to offer, and how people are likely to be paying you. THEN work out how much each type of payment method is going to cost you.
Processing credit cards or Paypal isnt free as we all know. So build in that average cost into your sales price across the board. If you do this, when a client pays by debit card or bank transfer you're up! It's far better to underestimate your profits and wake up with more money in your bank than you expected than to do it the other way around.
Do you really need to offer credit?
Many people offer credit without thinking it through because they are chasing deals. If it's a company you can sign up to a number of credit reference agencies for a reasonable sum of money. This will at least give you more background information on a company before effectively giving them your stock for nothing.
It will also expose some fakes, and warn you in advance in some cases of potentially fraudulent "businesses."
A company I used to deal with accepted a PO for £500,000 from a major fast food retailer. Everything looked fine but for some reason they requested shipping all the equipment to a bonded warehouse in London. Now for me that would have set alarm bells ringing, but they did it and the gear disappeared onto a boat bound for Africa. One phone call to the head office of the client would have prevented this company ultimately going out of business. Never forget common sense. If it seems fishy in any way at all then line all your ducks up in a row, do the relevant checks making a pain of yourself if you need to but it's your business on the line. If you're still not happy, then walk away. You MUST have the balls to do this. The ability to walk away from a deal has saved many many people.
If you DO offer credit to businesses then I recommend that you investigate either credit insurance or factoring. Yes, yes I hear the wails of "it costs money" - you're right it does. To make things worse it cost a lot more in the first two years whilst you develop a track record with the insurers too but the prices will drop, and you're in this for the long haul aren't you?
Effectively NOTHING should leave your premises without either payment up front, or some kind of insured credit. I appreciate this is an ideal situation, but please accept the advice because it's how I've grown my business dramatically with only tiny "write offs" for bad debt.
I don't recommend ever giving credit (and remember we're talking about a stock business here) to individuals.
They have credit cards, and are a right royal pain to get money out of "after the fact." Most people are used to paying up front, certainly for online purchases and purchases from a shop so there you go.
So, you've now hopefully got a sound financial way of operating and now you need to work out how to get the money IN that you've safely offered out on credit. Whatever the terms you agree, whether it's 7 days, 14 days, 30 days, or 30 days nett you need to make sure EARLY in the process that the client has the invoice. Get clarification of this because the biggest single excuse for late payment is "I haven't received your invoice" so NAIL THIS ONE EARLY.
Set your T and C so that any discrepancies, shorts, or other non fault problems with an order have to be notified within 7 days of receipt.
This will also prevent the 30 day wail of "but we only received 3 out of the 4," or "one arrived damaged." Put yourself on the position where the excuses for late payment are reduced dramatically by setting up your systems to prevent them.
Mail clients a week before due, or even phone, to politely ensure that the £xxx due on 30th Dec will be paid and you have all our relevant payment details. Again this won't work for them all but it does reduce dramatically the number of late payers.
Everything I have said here is designed to REDUCE- not eliminate the problems you'll get. This is all you can do because you're always going to come up against a bad payer, or a downright evil one. It's literally a numbers game because it's all about shaving the odds in your favour.
If you hit one bad payer when the rest are nailed on, it's going to be much less of a problem than if the rest are also late right?
To summarise:
Use common sense, get your processes right, stay on top of your money, reduce the risks, and shave the odds of problems.
I'll put another thread up next week about cash flow for non stock businesses, but I hope this helps someone, somewhere grow their business with less pain than they might have had!
Regards
Jon
Stock based business cash flow management tips.
It really doesn't matter whether you choose to run a lifestyle business from home, or a Corporation with 30,000 sq ft or more of warehousing because the principles here remain the same.
Remember this mantra- cash is king. Without it you are dead in the water.
Firstly and before anything, you need to ensure that your credit terms are nailed down and sorted out. Make sure your terms and conditions have a "retention of ownership" clause in them for starters.
Keeping the money coming in is one of the hardest things that you will have to do in business and if you get your systems right at outset, you will save an awful lot of pain later on.
Many businesses get this wrong, and the result is very often the failure of the business so whatever you do, don't skimp on this part. You can be making huge margins on paper, but if you can't pay your suppliers, again, you're dead in the water.
Spend some time working out what kind of payment terms (if any) you're going to offer, and how people are likely to be paying you. THEN work out how much each type of payment method is going to cost you.
Processing credit cards or Paypal isnt free as we all know. So build in that average cost into your sales price across the board. If you do this, when a client pays by debit card or bank transfer you're up! It's far better to underestimate your profits and wake up with more money in your bank than you expected than to do it the other way around.
Do you really need to offer credit?
Many people offer credit without thinking it through because they are chasing deals. If it's a company you can sign up to a number of credit reference agencies for a reasonable sum of money. This will at least give you more background information on a company before effectively giving them your stock for nothing.
It will also expose some fakes, and warn you in advance in some cases of potentially fraudulent "businesses."
A company I used to deal with accepted a PO for £500,000 from a major fast food retailer. Everything looked fine but for some reason they requested shipping all the equipment to a bonded warehouse in London. Now for me that would have set alarm bells ringing, but they did it and the gear disappeared onto a boat bound for Africa. One phone call to the head office of the client would have prevented this company ultimately going out of business. Never forget common sense. If it seems fishy in any way at all then line all your ducks up in a row, do the relevant checks making a pain of yourself if you need to but it's your business on the line. If you're still not happy, then walk away. You MUST have the balls to do this. The ability to walk away from a deal has saved many many people.
If you DO offer credit to businesses then I recommend that you investigate either credit insurance or factoring. Yes, yes I hear the wails of "it costs money" - you're right it does. To make things worse it cost a lot more in the first two years whilst you develop a track record with the insurers too but the prices will drop, and you're in this for the long haul aren't you?
Effectively NOTHING should leave your premises without either payment up front, or some kind of insured credit. I appreciate this is an ideal situation, but please accept the advice because it's how I've grown my business dramatically with only tiny "write offs" for bad debt.
I don't recommend ever giving credit (and remember we're talking about a stock business here) to individuals.
They have credit cards, and are a right royal pain to get money out of "after the fact." Most people are used to paying up front, certainly for online purchases and purchases from a shop so there you go.
So, you've now hopefully got a sound financial way of operating and now you need to work out how to get the money IN that you've safely offered out on credit. Whatever the terms you agree, whether it's 7 days, 14 days, 30 days, or 30 days nett you need to make sure EARLY in the process that the client has the invoice. Get clarification of this because the biggest single excuse for late payment is "I haven't received your invoice" so NAIL THIS ONE EARLY.
Set your T and C so that any discrepancies, shorts, or other non fault problems with an order have to be notified within 7 days of receipt.
This will also prevent the 30 day wail of "but we only received 3 out of the 4," or "one arrived damaged." Put yourself on the position where the excuses for late payment are reduced dramatically by setting up your systems to prevent them.
Mail clients a week before due, or even phone, to politely ensure that the £xxx due on 30th Dec will be paid and you have all our relevant payment details. Again this won't work for them all but it does reduce dramatically the number of late payers.
Everything I have said here is designed to REDUCE- not eliminate the problems you'll get. This is all you can do because you're always going to come up against a bad payer, or a downright evil one. It's literally a numbers game because it's all about shaving the odds in your favour.
If you hit one bad payer when the rest are nailed on, it's going to be much less of a problem than if the rest are also late right?
To summarise:
Use common sense, get your processes right, stay on top of your money, reduce the risks, and shave the odds of problems.
I'll put another thread up next week about cash flow for non stock businesses, but I hope this helps someone, somewhere grow their business with less pain than they might have had!
Regards
Jon
