Things to think about when thinking about payment terms
Newsflash: Cash flow is still the number one priority to many businesses out there today and rightly so. Some have described it as oxygen keeping their businesses alive, others see it as fuel that drives their commercial success.
For something so widely understood to be of such high value to enterprises, it’s surprising that more isn’t being done to safeguard it. That doesn’t mean people are necessarily being careless with income and expenditure – far from it. It may simply mean that the numbers behind the numbers are not being recognised for what they can do for or to your business.
What really counts
We’ve often said it but here at Inspire, we are numbers people and we’re proud to say that we’re the type of numbers people for whom everything counts. That’s not just a snappy pun, it means that we like to think about why your costs and earnings are the way they are. These days, going beyond mere reporting of what’s taken place is far from enough. We (you) need to know where improvements can be made, how, why and when.
Here’s a way of improving your cash flow position starting right now
When you receive a hefty electricity bill, car rego notice or even a chunky supplier invoice there can often be feelings ranging from mild concern to white hot panic depending on your circumstances. The further along the panic continuum you find yourself, the more urgently you find yourself looking for the due date. And it feels great when you realise you still have a month to pay. At this point you are relieved and grateful for that grace period and you might move on with your day from there.
But just because the government, the utilities suppliers or your telecommunications provider is happy to wait for its money, should you follow suit? Keep in mind, they may be a national or international service provider, you might be a start-up. They may have a cash sheet that looks more like old-school binary code because of the clusters of zeroes in the credit column, you may be slowly building something that will benefit your family.
Let’s contextualise this: If you're a $1 million business and your customers, on average, take 30 days to pay you, imagine for a moment if they only took 29 days to pay you. The positive effect on your bank balance is almost $4000 (based on $1m divided by say 253 normal work days). That’s just one day’s difference. $4000. What if you brought that number from 30 days down to 10? Suddenly you’re looking at numbers like $50-60k in additional liquidity! These are important little equations that make a big difference to small businesses.
Why then, should you extend the same generous payment terms that essentially tie up your cash as a large corporation? You’re not obligated to extend 21, 30 or 60 terms if it simply doesn’t suit your business model and your cash flow requirements. If you are a small business or even a medium sized enterprise, base your payment terms on your cash requirements. Here are a couple of tips to employ right now:
Speak to your accountant about what your cash flow should look like. Ask about what kind of terms would best benefit your business and accommodate growth and sustainability – based on the numbers.
The moment a customer engages your services, ask for a deposit. It signals to them that you are now committed to the work and by the same token it gives you a little bit of liquidity – and peace of mind.
We love a chat here at Inspire, as long as we’re chatting about numbers (only half joking here), so to make these tips and more part of your business as usual, drop us a line about your number one business priority along with the rest of them.