Why is the way we pay bills in our personal lives so vastly different from the way we collect money in our businesses?
In our personal lives we pay our bills on time, Creditors charge high interest rates and impose late charges when payments are even one day late.
In addition, insurance coverages are cancelled for non-payment of premiums. We also pay for services performed at our homes or businesses when they are performed.
However, in our business lives:
- We extend credit to our customers without the benefit of a credit application or personal guarantee
- We send out our invoices on an irregular basis (e.g., we do all of our billing at the end of the month)
- We don’t want to offend” our customers by asking for a down payment and signed agreement or asking them to pay us for our work when it’s completed (we take “we’ll put the check in the mail” for an answer)
- We allow customers to “make payments.”
Yet we wonder why we never seem to have much cash?!
The answer to this dilemma is to have a credit policy that is:
- In writing
- Clearly communicated to all associates
- Followed as a normal course of business
- That’s balanced (i.e., not so rigid that sales are lost).
Collecting your money promptly:
- Allows you to pay your bills and put your cash into savings where it earns interest
- Allows you to earn substantial discounts from your vendors
- Allows you to make yourself an even more valuable customer of your largest creditors.
Vendor Payment Terms
One way you can easily make more money for your business is to take advantage of the 2% 10, Net 30 terms that many of creditors offer .
This means if you pay the invoice within 10 days, you may take a 2% discount off of the invoice amount (net of sales tax and shipping costs), or you can pay the net amount of the invoice in 30 days.
Say you receive an invoice for a 3-ton condensing unit at $1,200 (plus shipping and tax) from your distributor. If you pay it within 10 days and take a 2% discount ($24), what does that equate to as an annual interest rate?
Do the math:
- You’re being paid 2% for paying an invoice 20 days early (e.g., on September 25 instead of October 15)
- There are 18, 20-day periods in one year (360 divided by 20)
- 2% x 18 periods in one year equals 36% APR!
That’s a great rate! Where else can you earn 36%?
However, you have to collect your money from your clients promptly in order to be able to take advantage of these tremendous rates! How do you do that? By establishing a credit policy!
Your Credit Policy
Create a policy for each type of sale you want to make.
Service work: With homeowners, collect for your service work at the time the work is performed. Consider extending courtesy billing to your maintenance customers. If you take credit cards, consider getting your customer’s credit card number and authorization to automatically charge service work to their credit card.
For businesses, collect at the time service is performed. Of course if their checks are processed at remote accounting offices, you’ll have to bill them.
Installation work: With residential work, ask for a down payment, a final payment, and/or offer financing options.
For commercial work, are you working for a general contractor? An end user? This is an area where you can make significant improvements to your cash flow. Don’t wait until the end of the month to send out bills. Send an invoice with your technician on the day they finish the work.
Counter sales/shipped orders:Do you sell service parts over the counter? If so, you should have a policy stating who you sell to, what your return policies are, and what your policies are regarding shipping and handling costs.
Down payments have nothing to do with trust - and everything to do with business. It’s all about cash flow. Don’t hesitate to explain that to any customer who is reluctant to part with his or her money.
On every single proposal, ask for at least a 13 down payment. Consider asking for 50% (check consumer laws in your area for limitations).
Require that down payments be made before the work starts, preferably at the time the contract is signed.
Ask for the down payment matter of factly. Don’t ask, “Would you mind giving me a down payment?” Be firm, yet polite: “All I’ll need now is a check for 13 as down payment.”
Another benefit of asking for down payments is that for larger projects, you will be able to pre-pay for equipment with long lead times. This entitles you to yet another discount!
Next month, we’ll continue this discussion as we talk about the art of negotiation, payment terms, and consumer financing.
Robert C. (“Bob”) Ring is owner and executive vice president of Meyer & Depew Co., Kenilworth, NJ. He may be reached at [email protected].