Need to improve your cash flow?
Well who doesn’t?!
Here’s three small things you can do to have a significant improvement on your cash flow that my clients have applied successfully.
How long is it since you last increased your prices? A few months, a year, two years even? I find that many business owners haven’t increased their prices for well over a year, even though their suppliers have! So, why is that?
Often it’s simply that they fear losing their customer.
So let’s consider why they think that way, but from their customer’s perspective.
I am assuming here that the customer is perfectly satisfied with the service/product they are buying from us. If not, then we have a bigger problem than thinking about raising our prices!
Thus, if our customer is satisfied with our service/product, what are their options when we raise the prices?
Yes – they could look to buy from the competition, but how do they know that the service they provide will be as good as that which they currently receive from us? It might be, it might not. So now an element of uncertainty has arisen in their minds. Mostly, we prefer the known to the unknown.
Secondly, they now have to spend their time looking for someone else, and even if they do find them, they then need to spend time effecting the changes to a new supplier. This whole change is now beginning to look like a time consuming exercise and mostly we value convenience! In short, often we can’t be bothered, unless we are certain of a significant improvement in value for money.
Accordingly, our customer finds themselves balancing a price increase against the uncertainty of the quality of service/product from another supplier and the inconvenience of spending their time making the change.
If our price increase is perceived as reasonable, given the long time since the last increase, then most customers will simply accept it and get on with their business life!
All we have to do is give them a rational reason for the increase and that usually satisfies most people.
So what is a ‘rational reason’? Typically it runs along the lines of ’in order to continue to provide the service you currently enjoy, I need to be able to pay good rates to attract the best staff and afford the best materials. These have increased over the last year or so and I now need to reflect those changes in my own prices. Does that make sense?’
They may not like it (!), but they will more than likely accept it.
As always, there’s no guarantee that all customers will accept it, but the increased profit from the majority who do, will more than offset the loss from the few who may not.
Give it a try, and see the benefit!
So how promptly do you raise your invoices? On completion of the job/delivery? A few days later? A few weeks later? Hmmm!
Do you even raise interim invoices for jobs lasting more than a month?
Do you require a deposit on acceptance of order to secure the timing of the delivery of your service/delivery?
All of the above can often be tightened up with a significant improvement in the timing of receiving payment.
If you’re not delivering your invoice within 48 hours of completion of service/product delivery – why not? What’s getting in the way of this? Haven’t got time? Don’t like doing the paperwork? Then consider firstly how important to you is it to achieve this improvement. What impact would it have on your business if you got this sorted out properly?
Could you take on someone else to do it for you? Consider the benefit to you of this improvement and balance that against the cost of someone else doing it. It may well make sense when you take the time you save in to account as well, especially if you can do more revenue generating activity yourself now that would pay for their cost.
Interim billing. If the job takes more than a month to complete, consider positioning all customers before you start, that interim bills will be raised as you need to fund staff salaries and supplier payments as the job progresses. Most customers will understand this. Make sure you agree this before you start the job, when you have the most leverage!
Deposits. Often customers will value the peace of mind of knowing that they have secured a supplier and a date for completion of the service/product. If this is particularly important to them, then they will be open to paying a deposit to secure that. Don’t be shy in raising this at the time of them agreeing to place the order with you. Again, this is when you have the most leverage.
Probably the area most business owners dislike, is having to chase for money! None of us do, as it feels incompatible with our normal client relationship.
So what could we do to alleviate it?
In short, the key lies in how we position our payment terms with the client when we first take them on.
Many don’t say anything at that time. They simply hope the new client will read the small print on our invoice and pay accordingly. Wish that everyone was so conscientious!
The reality is that people pay when it happens to suit them, unless they have explicitly agreed to your terms.
Thus, we need to explicitly agree our payment terms when we take on the new customer. It needs to be a standard part of our conversation. Not something to be avoided or omitted altogether.
The best time to advise them of your payment terms is immediately after they have agreed to buy from you. That is when they are least likely to demur.
Without obtaining their oral agreement to your terms at that moment, debt collection will be much much harder.
Once we have obtained their agreement to your terms, debt collection becomes a relatively simple process of invoicing promptly as you have agreed and following up no more than 2 days after each payment is due.
The conversation can be along the lines of ’just wanted to make sure that everything was ok with the service/product we provided the other day. Is that ok?’
If they say yes, then just gently remind them of the payment terms they agreed and ask if there is any difficulty in applying those. Whatever they say, deal with it as appropriate, but do not finish the conversation until they have given you a specific date when they will pay.
If they still don’t pay, then repeat the above process . The general rule here is that if they don’t do what they explicitly say they will on three occasions, then maybe this isn’t a client for you and it moves to legal proceedings.
- Raise your prices – Update in line with inflation, wage costs, and all other overheads, and do it confidently because let’s face it, we ALL need to recalucalute regularly.
- Billing – Either consider interim billing or taking a deposit for your services and have a system to invoice promptly (within 48 hours of service).
- Debt collection – get a clear answer when they will pay if they are late for some reason. Three Strike Rule: if someone will not pay their dues on time, consider letting the client go. All the time and worry you spend chasing them up is also a lost resource!
If you apply all of the above, then cash flow will improve significantly.