Cash Flow: 5 Ways to Get Clients to Pay Faster and More Frequently
Even in the best of times, getting clients to pay invoices promptly is a challenge for most businesses. During the current economic crisis, it has become a matter of financial survival.
For example, a recent white paper from the construction industry, the 2020 National Construction Payments Report, found that 80% of companies spend a good portion of their workweek chasing down payments.
Likewise, a recent U.S. Bank study found that 82 percent of failed small businesses attributed this failure to poor cash flow management and a lack of understanding about how cash flow affects the health of a business.
Happily for firms who may find themselves in a cash crunch, there are several actions and strategies that companies can take to get clients to pay on time, keep money moving, and help augment your firm’s bottom line.
Here some time-proven cash-flow strategies that can help your company in its efforts to successfully navigate through the financial challenges we face:
Negotiate Better Payment Terms – Immediately open discussions with your vendors to explore the possibility of extended payment terms. After all, having cash in your account for even just two or three more additional weeks could help ease the pressure on your bank account. Also, explore the possibility of discounts. If your vendor will not extend payment terms, find out if they will grant you a small discount for paying early, noting that a small discount for paying in, say, 10 days rather than the standard 30 days could help your bottom line. Many organizations may find themselves in a financial bind during this economic crisis. Smart companies will want your business when the storm is over and will be wise to work with you during this rough patch.
Collect Sooner – Now is not the time to be passive when it comes to collecting on invoices. The maxim, “the squeaky wheel gets the grease” often applies to collections. In a time of cash shortages, the invoices that get paid first are often associated with collection efforts. If you have clients who are late on payment, gently remind them of your company’s policy on late payments and penalties. Likewise, you might also offer a discount for prompt payment – e.g. 5% for funds received within a 14-day vs. 60-day period – or prepayment of invoices. Having these frank discussions with your clients will help you strengthen your ongoing relationships.
Explore Emergency Funding Options – The U.S. Small Business Administration (SBA) offers disaster loan programs designed to fit most any business situation. These loans offer up to $2 million in assistance for small businesses to offset loss of revenue associated with a disaster. Loans can be used for the payment of fixed debts, accounts payable, payroll and other disaster-related expenses.
Another option you might explore is the federal Paycheck Protection Program (PPP), designed to assist companies with 500 employees or less. This two-year program gives companies the opportunity to borrow up to $10 million at one percent interest to keep employees on the payroll during the pandemic crisis. Much of the PPP loan can be forgiven (aka becomes a grant you don’t have to replay) if employees are retained.
Make Productive Staffing Decisions – Every business should conduct a staffing inventory and honestly assess what positions are critical in the face of revenue drying up. Before downsizing staff (which we all wish to avoid), consider implementing alternate cost-saving measures, including temporary pay cuts, reduced hours, or staggered shifts, which allow you to hold on to valuable employees during an economic downturn. Alternately, you might consider reducing overhead by eliminating overtime, offering voluntary retirement options, and temporarily placing full-time employees on furlough or a part-time basis.
As you go about this process, don’t forget to consider the long-term impacts of lost knowledge, skills, and customer relationships, and lowered employee morale and productivity, that may result from any measures. Ultimately, every effort should be made to retain employees and redeploy employees towards performing mission critical functions. To this extent, employers should also conduct a talent assessment of existing personnel to determine which employees whose positions are impacted might quickly be redeployed towards performing other tasks within the company.
Renegotiate Contracts and Debts – During times of financial hardships, companies should look at every avenue to reduce financial liability. This could take the form of deferred rent payments, renegotiation of vendor contracts, as well as refinancing loans. Communicate early and often with banks and property owners during any renegotiation process. You’ll want to work together wherever possible to create working payment plans that allow you to meet your obligations while allowing a level of flexibility that can help you offset any cash crunch.
If you do find yourself in a cash crunch, remember: You’re not alone, and it’s a problem that many companies face. Case in point: A study by the JP Morgan Chase Institute of more than 600,000 small businesses found that the average small business has only 27 days of operating cash reserves on hand.
However, while surveys show that 73% say that they’ve seen revenues drop by more than half, it bears remembering: Many firms have successfully faced down economic downturns before and come out stronger for the effort. So while the current economic crisis, brought on by a global pandemic, has created unemployment levels not seen since the Great Depression of the 1930s, don’t forget. A little planning and ingenuity can help you turn your fortunes around, and those companies who exercise a little more creativity and flexibility to maintain a positive cash flow will be far better equipped to weather the storm.