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Small Business Financials: Smart Ways to Get Paid Faster OVERVIEW: A Tale of Two Plumbers
Imagine watching a split-screen of two plumbers going into separate homes in the same neighborhood to install hot water heaters. The jobs seem almost identical right up to the point of payment. The plumber on the left leaves after the work is done and sends an invoice about a week later. He finally gets paid in about 45 days. The plumber on the right hands the homeowner a prepared invoice, takes their credit card and swipes it through a device attached to his smart phone. He gets paid in 60 seconds. This story serves to illustrate there are ways to avoid or reduce outstanding invoices. In this guide, we’ll review a few simple steps you can take to change your accounts receivable from net 30 days to net 30 seconds.
“It’s only cash CHASING MONEY when you Since the notion of credit was first introduced, customers have been late paying their bills. This time-worn tradition can weigh heavily on the cash flow of a small get the money.” business. Owners must remember that making the sale doesn’t guarantee you will – SCORE mentor, Bill Ranganath
be paid for it. According to SCORE mentor Bill Ranganath, “it’s only cash when you get the money. “That’s why pursuing late-paying customers must be one of your business’s highest priorities.” According to a survey by the Commercial Collection Agency Association, after only three months, the probability of collecting a delinquent account drops to 69.6%. After six months, it’s down to 52%. After one year, the chance of ever collecting on a past due account is a dismal 22.8%. “Whether times are good or bad, you should always follow up receivables promptly,” says SCORE mentor Frank Wey. “If you give 30 days, on the 35th day you should be on the phone. That’s a rule that doesn’t depend on the business environment.”
9 TIPS ON EXTENDING CREDIT
Visa usa.visa.com/business facebook.com/visasmallbiz @VisaSmallBiz SCORE www.score.org facebook.com/SCOREFans @SCOREMentors
One way of avoiding late paying customers is to not extend credit terms to any customer as a rule in your company. The downside risk is that you lose business from people who prefer paying net 30 for products and services. For many small business owners and service providers, extending credit is an essential component of the business model and is part of the industry norms. Whether you are an architect, lawyer, marketing consultant or a catering company, there are clients who expect to be invoiced well after the services are delivered— in some cases after the value delivered is long forgotten. To decide whether or not extending credit is a viable option, do some competitive research. Are other companies in your industry offering credit terms to CONTINUED
>
www.facebook.com/visasmallbiz
“If you give 30 days, on the 35th day you should be on the phone. That’s a rule that doesn’t depend on the business environment.” – SCORE mentor, Frank Wey
Visa usa.visa.com/business facebook.com/visasmallbiz @VisaSmallBiz SCORE www.score.org facebook.com/SCOREFans @SCOREMentors
customers? If you decide to offer credit, here are nine tips to protect yourself.
1. Get it in writing. Have an engagement letter or services agreement to protect your legal right to be paid fairly for services rendered. 2. Get a deposit or a retainer. This helps to reduce your overall financial exposure.
3. Get your invoices out quickly.The longer you sit on your bills, the slower you will get paid. 4. Communicate early and often. Customers tend not to pay quickly or at all when
they are dissatisfied. Reach out to them right away if there is a problem or a dispute and talk it through. Be ready to compromise if their complaints or concerns are legitimate, but only in exchange for prompt payment on the adjusted balance. 5. Establish budgets and target ranges. Customers hate surprises. If the bill is much
higher than expected, they might delay payment in protest.
6. Get creative. Can you include mutual incentives for prompt payment? Can you
break payments into installments? If you make it easier and more rewarding to help them pay you, you might get paid faster.
7. Establish mutually beneficial and dynamic relationships with your customers and clients. Customers will pay faster when they like you, appreciate your product/service and feel as though it is a two-way street. 8. Try the carrot before the stick. If a customer pays late, don't threaten them with litigation until you first try to work things out. A reasonable approach is less invasive and less stressful. It can also save your business relationship.
9. Protect against the inevitable. If you know that customers or clients will pay late, then make
sure you have a line of credit or access to financing to cover cash flow gaps.Your business is a car. You are the driver. Cash flow is the gas that makes your business go. CONTINUED
>
www.facebook.com/visasmallbiz
4 BENEFITS OF ACCEPTING ELECTRONIC PAYMENTS
Accepting electronic payments, such as credit or debit cards, at the time of service or when the product is delivered, offers numerous benefits to the business owner. In addition to improving time management (because you’re not chasing invoices), there are at least four recognizable reasons for accepting electronic payments in business:
1. Reliable & secure transactions – Credit card companies have invested heavily in advanced fraud-fighting technology.This means small business merchants can assure customers that their credit information is safe.
According to the Visa Payment Panel Study, customers who pay by credit or debit cards tend to spend more money.
2. Increased efficiency – As a business owner, cash flow is a critical component of your company’s success. By accepting electronic payments, your business will have access to funds much faster than if you just accepted paper checks. Electronic payments are typically settled in 24-72 hours as opposed to paper checks which can take up to seven business days. More importantly, payments from credit cards don’t bounce; checks can and do.
3. More Money for You – According to the Visa Payment Panel Study, customers who pay by credit or debit cards tend to spend more money. In America, the average cash transaction is $17, the average purchase by debit card is $42 and $66 by credit card.
4. Better buying experience – In the end, you want to have strong, loyal relationships with your customers. By giving them payment options and letting them know that their payments are safe and secure, you are showing customers that they matter to you and your company.
SUMMARY CHECKLIST: 4 Points
■ Review your existing Accounts Receivable situation. If it’s not working, commit to learning more about options to dramatically reduce the time it takes to get paid by your clients/customers. ■ If you have receivables that are over six months past due, you have slightly better than a 50/50 chance of ever collecting the money. What can you do to get those customers to pay their invoices? Connect with a SCORE mentor to see how you can implement one of the solutions in this guide to help collect on unpaid balances. ■ If you extend credit to your customers, follow the nine tips to protect your business. ■ Look into accepting electronic payments for your business. Will the 4-5 benefits have a measurable impact on managing and growing your company?
Small business resources from Visa
Small businesses that seek solutions to help manage their business can turn to Visa Business for support. For information about Visa’s small business solutions, visit visa.com/business Visa usa.visa.com/business facebook.com/visasmallbiz @VisaSmallBiz SCORE www.score.org facebook.com/SCOREFans @SCOREMentors
Additional resources: For more small business resources to grow your business, go to Visa’s Small Business Resources & Tools page at http://usa.visa.com/business/resources-andtools/index.jsp
Facebook page is the place for small business owners to find efficient solutions, in-depth information, and trusted resources. Every month, we explore a topic and offer actionable ideas for taking care of your business, your employees, your customers, and yourself.
Also, connect with Visa Business for up-to-the-minute tips, tools and more. Our Well Sourced by Visa Business
facebook.com/visasmallbiz twitter.com/visasmallbiz
Small Business Financials: Smart Ways to Get Paid Faster OVERVIEW: A Tale of Two Plumbers
Imagine watching a split-screen of two plumbers going into separate homes in the same neighborhood to install hot water heaters. The jobs seem almost identical right up to the point of payment. The plumber on the left leaves after the work is done and sends an invoice about a week later. He finally gets paid in about 45 days. The plumber on the right hands the homeowner a prepared invoice, takes their credit card and swipes it through a device attached to his smart phone. He gets paid in 60 seconds. This story serves to illustrate there are ways to avoid or reduce outstanding invoices. In this guide, we’ll review a few simple steps you can take to change your accounts receivable from net 30 days to net 30 seconds.
“It’s only cash CHASING MONEY when you Since the notion of credit was first introduced, customers have been late paying their bills. This time-worn tradition can weigh heavily on the cash flow of a small get the money.” business. Owners must remember that making the sale doesn’t guarantee you will – SCORE mentor, Bill Ranganath
be paid for it. According to SCORE mentor Bill Ranganath, “it’s only cash when you get the money. “That’s why pursuing late-paying customers must be one of your business’s highest priorities.” According to a survey by the Commercial Collection Agency Association, after only three months, the probability of collecting a delinquent account drops to 69.6%. After six months, it’s down to 52%. After one year, the chance of ever collecting on a past due account is a dismal 22.8%. “Whether times are good or bad, you should always follow up receivables promptly,” says SCORE mentor Frank Wey. “If you give 30 days, on the 35th day you should be on the phone. That’s a rule that doesn’t depend on the business environment.”
9 TIPS ON EXTENDING CREDIT
Visa usa.visa.com/business facebook.com/visasmallbiz @VisaSmallBiz SCORE www.score.org facebook.com/SCOREFans @SCOREMentors
One way of avoiding late paying customers is to not extend credit terms to any customer as a rule in your company. The downside risk is that you lose business from people who prefer paying net 30 for products and services. For many small business owners and service providers, extending credit is an essential component of the business model and is part of the industry norms. Whether you are an architect, lawyer, marketing consultant or a catering company, there are clients who expect to be invoiced well after the services are delivered— in some cases after the value delivered is long forgotten. To decide whether or not extending credit is a viable option, do some competitive research. Are other companies in your industry offering credit terms to CONTINUED
>
www.facebook.com/visasmallbiz
“If you give 30 days, on the 35th day you should be on the phone. That’s a rule that doesn’t depend on the business environment.” – SCORE mentor, Frank Wey
Visa usa.visa.com/business facebook.com/visasmallbiz @VisaSmallBiz SCORE www.score.org facebook.com/SCOREFans @SCOREMentors
customers? If you decide to offer credit, here are nine tips to protect yourself.
1. Get it in writing. Have an engagement letter or services agreement to protect your legal right to be paid fairly for services rendered. 2. Get a deposit or a retainer. This helps to reduce your overall financial exposure.
3. Get your invoices out quickly.The longer you sit on your bills, the slower you will get paid. 4. Communicate early and often. Customers tend not to pay quickly or at all when
they are dissatisfied. Reach out to them right away if there is a problem or a dispute and talk it through. Be ready to compromise if their complaints or concerns are legitimate, but only in exchange for prompt payment on the adjusted balance. 5. Establish budgets and target ranges. Customers hate surprises. If the bill is much
higher than expected, they might delay payment in protest.
6. Get creative. Can you include mutual incentives for prompt payment? Can you
break payments into installments? If you make it easier and more rewarding to help them pay you, you might get paid faster.
7. Establish mutually beneficial and dynamic relationships with your customers and clients. Customers will pay faster when they like you, appreciate your product/service and feel as though it is a two-way street. 8. Try the carrot before the stick. If a customer pays late, don't threaten them with litigation until you first try to work things out. A reasonable approach is less invasive and less stressful. It can also save your business relationship.
9. Protect against the inevitable. If you know that customers or clients will pay late, then make
sure you have a line of credit or access to financing to cover cash flow gaps.Your business is a car. You are the driver. Cash flow is the gas that makes your business go. CONTINUED
>
www.facebook.com/visasmallbiz
4 BENEFITS OF ACCEPTING ELECTRONIC PAYMENTS
Accepting electronic payments, such as credit or debit cards, at the time of service or when the product is delivered, offers numerous benefits to the business owner. In addition to improving time management (because you’re not chasing invoices), there are at least four recognizable reasons for accepting electronic payments in business:
1. Reliable & secure transactions – Credit card companies have invested heavily in advanced fraud-fighting technology.This means small business merchants can assure customers that their credit information is safe.
According to the Visa Payment Panel Study, customers who pay by credit or debit cards tend to spend more money.
2. Increased efficiency – As a business owner, cash flow is a critical component of your company’s success. By accepting electronic payments, your business will have access to funds much faster than if you just accepted paper checks. Electronic payments are typically settled in 24-72 hours as opposed to paper checks which can take up to seven business days. More importantly, payments from credit cards don’t bounce; checks can and do.
3. More Money for You – According to the Visa Payment Panel Study, customers who pay by credit or debit cards tend to spend more money. In America, the average cash transaction is $17, the average purchase by debit card is $42 and $66 by credit card.
4. Better buying experience – In the end, you want to have strong, loyal relationships with your customers. By giving them payment options and letting them know that their payments are safe and secure, you are showing customers that they matter to you and your company.
SUMMARY CHECKLIST: 4 Points
■ Review your existing Accounts Receivable situation. If it’s not working, commit to learning more about options to dramatically reduce the time it takes to get paid by your clients/customers. ■ If you have receivables that are over six months past due, you have slightly better than a 50/50 chance of ever collecting the money. What can you do to get those customers to pay their invoices? Connect with a SCORE mentor to see how you can implement one of the solutions in this guide to help collect on unpaid balances. ■ If you extend credit to your customers, follow the nine tips to protect your business. ■ Look into accepting electronic payments for your business. Will the 4-5 benefits have a measurable impact on managing and growing your company?
Small business resources from Visa
Small businesses that seek solutions to help manage their business can turn to Visa Business for support. For information about Visa’s small business solutions, visit visa.com/business Visa usa.visa.com/business facebook.com/visasmallbiz @VisaSmallBiz SCORE www.score.org facebook.com/SCOREFans @SCOREMentors
Additional resources: For more small business resources to grow your business, go to Visa’s Small Business Resources & Tools page at http://usa.visa.com/business/resources-andtools/index.jsp
Facebook page is the place for small business owners to find efficient solutions, in-depth information, and trusted resources. Every month, we explore a topic and offer actionable ideas for taking care of your business, your employees, your customers, and yourself.
Also, connect with Visa Business for up-to-the-minute tips, tools and more. Our Well Sourced by Visa Business
facebook.com/visasmallbiz twitter.com/visasmallbiz
