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Business Master QuickTip - Cash Management

In a previous posting, we made the point that cash flow, its generation, its conservation and, overall, its management is the single most important discipline an entrepreneur must learn to be truly successful. In that posting we dealt with cash generation. Today, we'll address an increasingly critical problem - cash management - controlling collections and payments.

It's one thing to cause a cash generation event (a sale), another entirely to collect on that event. In times like these, creativity is a necessity in getting paid. Providing incentives to customers (discounts for early payments) may not be enough to get them to move payments from a 30 or 45 day cycle to 15 days. However, if you're in the services business, you can attack the problem from a pricing and invoicing timing perspective.

All customers look for "deals." Give them one, but make it a positive for you. Instead of billing them monthly, after the fact, "cut a deal" for a six or twelve month pricing, with estimated services billed in advance (30 days or one quarter ahead), based on historical usage, with a 5-10% discount. Provide a reconciliation 30 days in arrears and adjust future bills accordingly (up or down). While it reduces margins some, it gets precious cash in early and also provides an incentive for you to get efficiencies into your service offering. Plus, since you're billing in advance, the customer can't get very far behind without the potential of you shutting off the service.

If you deliver a product, establish a pricing policy that ensures that you don't ship the product without a majority, if not all of the product paid for prior to shipment. If it's a high value product ($10,000 +), establish staged pricing - with multiple payment points, deposit at contract signing, additional payment either time-based (30 days later) or event-based (goes into production) and remainder prior to shipment. If there is a "shakedown" or acceptance period for the product, you might have a reserve of 10% (no more) to be paid within x days after that period. In no event should you ship the product without, at least, all of your costs covered.

Not all customers will like these pricing models, but you'll never know unless you try it out with actual customers. If you can get even a portion of your customers on them, you have taken a big step to getting and keeping collections under control. And remember, no matter what you offer customers, it has to be a "win-win" for both of you for it to work.

As for payments, it's a much simpler deal. Like your customers, you are going to stretch payments as far as you can without either incurring service charges or negatively impacting your supplier relationship. However, always try to negotiate terms, whether it's 2% 15 or something a little more creative. Your suppliers are also looking for cash. You just want to give them less than full invoice as late as possible.

Master Yoda knows these things. His job it is. May success be with you!