How To Increase Business Cash Flow Using Financial Policies
Increasing business cash flow is vital to every business. Many business owners only think in terms of getting new customers or using advertising to increase cash flow. They are leaving income lying on the table if they aren’t also setting financial policies to control their cash flow.
There are numerous actions a business can take to increase cash flow and using financial policies can play an important role in that effort.
Setting Firm Financial Policies That Increase Cash Flow
Setting financial policies that can speed up cash flow are very effective, especially when your sales team encounters a customer asking for special concessions. A few financial policies to consider are:
Getting Paid a Percentage or The Entire Amount Up-front – Ask for full or partial payment up-front or demand cash-on-delivery. Many businesses automatically offer payment terms or credit terms when customers would be more than willing to pay you up-front.
For service businesses that bill by the hour, setting a policy that all jobs or projects collect a pre-paid retainer, and work stops when the funds run out until the retainer is refreshed, is a very good policy and one that I operate on myself. Any business owner who has been burned more than once would do well to consider implementing this policy.
Break Up Payments For Large Jobs – If you offer terms to a customer you can make the deal based on several parts: an up-front payment to cover the cost of materials or inventory needed for the job, progress payments to cover labor, and a final payment. Make sure you include a portion for your profit in each part. Make it policy that you get a signed contract. Make sure you include a portion for your profit in each part.
Be Very Selective When Offering Payment Terms – A business does not have to offer payment terms to every customer. Be selective and make them qualify to get special terms. Qualifications can include things such as a large minimum order, or consistent orders that meet a smaller minimum each week or month. You can also shorten your terms to 10 days or 14 days instead of 30 days, or offer better prices for faster term payments, such as a 1 – 2% discount for payment in 10 days and full price for 30 day terms. Speed up collection by taking payments by credit card or pre-authorized EFT payments (electronic fund transfers) or direct debits you can make on the day a payment is due.
Write a policy that outlines the procedure for the customer to qualify for terms, and what the approval process is for your company. Be sure there is an approval process so terms are not “approved” for just anyone.
Make It Financially Painful For Late Payers – When you offer terms to a customer, have a contract they have to sign to get the terms, and make sure you include interest charges and late fees in a clause in the contract. Have an attorney draw up a boilerplate contract where you can fill in the blanks and find out what the laws are on usury before writing in the percentage for the interest or the amount for late fees that may invalidate your contract should you have to pursue collections in court. Make it policy that a signed contract is required before work starts.
Putting in firm cash flow management by instituting financial policies can quickly and effectively increase your cash flow, and they give your sales and administrative teams a set of “rules” to follow that keeps income flowing into the business.