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Giving Generous Payment Terms Kills Cash-Flow

When we order a computer online with Dell you pay before  the computer is even built. When you buy anything online you pay upfront on your credit card. You don’t pay, no sale, no delivery.

Can you remember anytime in the last 20 years or more where you walked into a retail store and purchased goods or services on account?

No?

So why is it that businesses often think that in the service industry or in business to business sales that they have to give credit?

Why Give Terms?

Because every one of your competitors gives terms, and you think if you don’t give generous terms, like 30 days, then you will lose business?

If giving generous terms is the only way that you think you are able to create customer loyalty, then other fundamental factors in your business could be missing.

This last comment holds especially true when you have been in business for many years and have loyal customers who would not leave just because you tighten your payment terms.

There are a lot of costs incurred by you upfront to deliver your goods and services, and then waiting to get paid really sucks.

Think of all those variable costs you have incurred to create your products or services for sale!

If you are a manufacturer of products you have invested in labour, materials, shipping – just to mention the main ones.

If you deliver services, you have paid your workers’/contractors’ fees and now you have to wait to get paid.

The Real Cost of Bad Debt

Of course, the worst of it is when a customer just doesn’t pay! As I have written many times before, bad debt costs you more than the dollar value of the bad debt. A bad debt of $1,000 is not just a loss of $1,000. Assuming your Gross Profit (sales less direct variable costs) is 30%, then you must divide the $1,000 bad debt  by 30%. When you do, your loss is actually $3,333, the amount of sales needed to recover the loss of $1,000.

Ok, so how can you change the rules of your game to get paid upfront or at least within 2 weeks?

One way is simply to change your terms. If you are a service business, you could ask for 50% upfront.

You can setup a pre-authorized payment plan and simply take the money out of their account after the services are delivered and the invoice is sent.

The Power of Cloud-Based Software

With cloud-based software there are now some terrific programs that will do the work of getting paid fast, and if you do give terms, one software program we use with our clients will chase the unpaid invoices for you to get paid quicker.

Here is the system I recommend:

  1. Only do business with customers who agree to your terms
  2. Outline in your service agreement or bill of sale that payment is due on receipt of goods
  3. Setup pre-authorized payment plans
  4. Obtain their credit card as an alternative to their banking details
  5. Tell them the funds will only be withdrawn after services or products are delivered

When we manage our clients receivables, we have a system that does the following:

  1. We email the invoice to the customer
  2. We use a system to auto-charge the customer every time an invoice is due
  3. We use a system to chase the invoices that don’t get paid

 

Thanks for reading….