The weeks between Thanksgiving and New Years are critical for many small and medium sized businesses, with sales during this period representing 20% – 30% of total annual revenue according to a survey by WePay https://www.prnewswire.com/news-releases/wepay-survey-reveals-substantial-end-of-year-payments-challenges-for-small-businesses-300555829.html.  And it’s not just retailers that see a spike in sales.  Related services, such as trucking, marketing, packaging, logistics, shipping, temporary staffing, and warehousing also see significant spikes in sales in the last quarter of the year.
 
But highly concentrated year-end revenue can be a double-edged sword, with many SMB’s reporting the financial boost from increased sales is often accompanied by significant customer payment and cash flow challenges.  In the same WePay survey, 70% of entrepreneurs reported that they experienced at least one critical cash flow issue between Thanksgiving and Boxing Day.  And dealing with late paying customers was the most-often cited problem, with 21% of respondents reporting they struggled with late payments and high Accounts Receivable (AR) at the end of the year.
 
Dealing with high AR and late payments not only costs most SMB’s money but also results in lost productivity, with 59% reporting having to spend staff time following up with customers on late payments at least two times on average before getting paid.
 
To start 2019 with a healthy cash flow, below are a number of best practices SMB’s should follow to ensure they get paid faster.
  1. Submit invoices electronically and immediately upon delivery of goods or service.
  2. Clearly state payment terms on all contracts and invoices.
  3. State the actual payment due date on invoices, in addition to payment terms.
  4. Make a follow up call after invoicing to confirm the invoice was received and is accurate and highlight payment terms and payment due date.
  5. Accept multiple payment options including wires, cheques, ACH, e-transfers, and credit cards. Make it easy for your customers to pay you.
  6. Offer customers discounts for early payment, for example 2% if paid within 10 days. Strictly enforce early payment discounts.  Charge back any discounts taken if not paid by the early payment deadline.
  7. Reduce payment terms. If offering 60 days, reduce it to 30 days.  If offering 30, reduce it to 15 days.
  8. Where possible, get a deposit before commencing work, especially for new customers.
  9. Be prepared to walk away from business if a customer’s payment terms are not sustainable for your business.
  10. Focus on diversifying your customer base so that one bad account does not cripple your business.
  11. Have clearly defined credit policies including conducting credit checks on customers before offering credit terms, implementing late payment fees, refusing new orders from late paying customers until their account is up to date, and implementing a Cash-on-Delivery policy for chronically late payers. Don’t be afraid to modify payment terms if a customer’s payments start slowing down or if there are other changes in the business relationship.
  12. Track average Days Sales Outstanding (DSO’s). Make it company-wide practice to reduce it by 20% in 2019.
  13. Despite your best efforts at developing and implementing a payment process, you may find that you are still at the mercy of your customers in determining payment terms. It is standard practice for most large and multinational corporations and government organizations to have 60, 90 and even 120 day payment terms.  When this is the case, make sure you factor in the cost of carrying their AR for an extended period of time into your pricing.  It is not your role to provide free financing to your customers.
  14. Most importantly, secure additional sources of working capital financing beforehand to manage through cash flow challenges caused by seasonal spikes in sales and late paying customers. Accounts Receivable Factoring can eliminate a lot of the cash flow headaches created by seasonal spikes.  Be prepared so that you are not crushed by growth.