In our last article, we talked about the importance of cash flow for the growth of a business. We established that no matter how big or small, cash rich or cash poor, or how much or how little debt a company carries, a business simply survives on its daily bread. The daily revenue not only sustains a company and helps it pay its bills and operating costs, but it also helps a company maintain a healthy credit profile with the banks. Now, we will discuss how invoicing is a vital aspect of cash flow. Essentially, invoices are how a company bills its customers for the goods and services it provides.
Losing track of billing is a sure way to lose track of cash flow. It hurts the company in two ways: First, it creates uncertainty about how much cash is available, and secondly, where that cash is now, or coming from. An automated, consistent, and reliable invoicing system creates a big picture along with a daily snapshot of income source and available time-frame. It helps a company look at how much cash it has before it even comes in. Plus, it “polices” the money that is not paid by customers on time. By creating constant reminders, customers become trained and get aligned with the billing company’s timing. Additionally, a strong software application can help you implement extras in your cash flow management plan. Here are some tips to improve cash flow from invoices:
1. Offer discounts for early payments
It is very clear that to improve cash flow of any business, the customers need to pay on time. If they are not paying on time, then they need to be motivated to pay sooner. But what could you do with the cash if customers paid early? A normal payment duration is 30 days, but companies offer a 2% discount if customers pay within 10 days. You can develop a policy and offer a similar discount.
2. Penalize late payers
As for penalizing late payers with interest, they may not always pay the interest. However, the penalty will send the message that your company is firm and serious about the payment policy. This may encourage customers to pay outstanding invoices to avoid the interest charges.
3. Estimate cash flow
Companies often face a cash flow crisis because they do not have a good grip of the future expenses versus income. They want to expand but have not planned for the expenditures. A 12-month cash flow forecast is a best practice to forecast your cash inflows and plan for expansion cash outflows. A cash flow forecast will allow you to compare sales, cash income from accounts receivable, normal expected expenses, and when growth can be internally funded.
4. Require deposits
In some industries, it is a best practice to prepay for goods and/or services. In other industries, standard practice is to require a deposit on goods and/or services. Most companies can require a 50% deposit. This reduces the risk of bad debt or overdue invoices from having so much cash tied up in a few large customers. Another best practice in this area is to clearly describe payments and terms in a contract signed by the customer and counter-signed by the company.
Invoicing can be wielded like a double-edged sword. Maybe even like a six-blade knife. Either way, that blade is going to start cutting the company’s way. When you go to slice the pie, it’s going to taste even sweeter when you see the cash flow at a glance. This will be thanks to your efforts to implement a simple plan, and also a software application that keeps track of your collection efforts for each customer. Good ones get discounts; this is positive reinforcement. Bad ones get penalized; this is negative reinforcement. Repeat offenders or unproven ones have to put down deposits; this is protection. Lastly, look at the ledger with confidence each night before you go home and relax; you now have a handle on the one number you need to know when the shareholders, buyout bids, and banks come calling: The Big C, cash flow.