Improving Customer Payments

One of the biggest issues a business can face is past due customer accounts. Here are some ideas for improving customer payments to minimize the issue.

Deposits and Advanced Payments

If you are going to be spending significant amounts to complete something for a customer and it will take a while to complete, consider getting a customer deposit. Let’s say that you know the materials will cost $500 for something you will later bill for $1,000 to the customer. It will greatly improve your cash flow if you can obtain a deposit from the customer for the material cost. Your risk of loss is also reduced.

Advanced or early payments can sometimes be obtained by offering a reasonable discount. If you think collection will be slow then it may be to your company’s benefit to grant a discount in exchange for payment up front before order fulfillment.

Early Payment Terms

Consider offering a reasonable discount for early payment as a way of improving customer payments. It is fairly common to grant a 1% to 3% discount for payment in 10 or 15 days instead of the normal 30 or 45 days. Not only do you get the money earlier, you also reduce the likelihood an invoice will become past due by 30, 45, 60, 90 or more days. So let’s say you sell something for $1,000 and your cost of sales is $500. That leaves you a gross margin of $500. If you grant a 2% discount for payment within 10 days rather than 30 days, you have given up $20 of your profit. Yet, at the same time you have avoided collection issues that can consumer far more than $20 of your time.

Credit Card Payments

Yes, you will be subjected to paying the credit card fees, but this is a standard way of getting paid at the time of purchase for retailers and online businesses. It is a good feeling to know you already have the payment before your customer leaves your store or you ship the merchandise. This is actually one of the easiest ways of improving customer payments if you are in the right kind of business. Incidentally, for online businesses you can use things like PayPal to only pay when their service used and avoid monthly fees. As you grow you may find that other credit card processors are more than willing to give you a bargain rate.

Is your company experiencing cash flow problems as a result of slow customer payments? If so, consider some of these methods. If, however, none of these are practical for you, then you at least need to stay on top of your receivables, carefully evaluate the credit worthiness of your customers, and communicate with customers as a standard part of the collection process. Incidentally, that communication does not always have to be in the form of a collection call, but can be structured as more of a customer service call to assess their satisfaction with you products and services.

If you want to know more, contact AimCFO – Contact

As always, your comments are welcomed.

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