Over the years I have created and built up a few businesses. People often ask me what are the must do’s, and I often speak to universities and business groups about these ideas. This article is the first of hopefully many, and perhaps the most important of them all: cash is king.
First, a couple of questions for all you web business owners out there. Do you give 30-day payment terms to your clients? If so, have you thought about the logic of what you are doing?
A little history
The net-30 day term concept came from the days where invoices were sent by post, arriving at the clients post room then moved internally to the finance department.
Once there they would be sent up to the department who initiated the work and signed off by the project leader then to be sent down to finance again.
Here, the poor invoice languished in one of many in-trays, until entered into the purchase ledger by rows of hapless clerks with quill pens.
They would then be scheduled for the ubiquitous ‘check run’ where the head of finance would go though the ledger, sign the cheque, then send it up to the Finance Director to countersign.
This boring, but extremely valuable, slip of paper was put in an envelope and sent down to the post room where it was posted, second class (remember we are talking about accounts departments here), where the supplier receives it in its own post room two days later.
The post room then sends said cheque down to the finance department where it is entered into the sales ledger, collated into the daily takings through the bank paying in book.
Another hapless soul takes the cheques to the bank.
The bank then processes the cheque and three days later, bingo! The money is finally credited to the suppliers account. Tremendous.
I can see this process taking 30 days, but in this fast, electronic age does it take that long?
No, the stages are basically the same, but the use of purchase order numbers, electronic billing, BACS/CHAPS/SWIFT and same day bill payments really streamlines the process. So why do we still offer 30?60 day terms?
Cash is king
If you have been in business long enough you will know providing credit is risky, eroding the company’s cash position and of course, offering trade credit to less-than-creditworthy clients results in bad debt.
I have seen loads of great firms go out of business due to poor cash management.
Accountants love profit and loss statements. I think they are good for forecasting or budgets, but useless in the day-to-day running of the business.
A well constructed and accurate cash flow forecast is a thing of great beauty; the Mona Lisa of the business owners tools.
Many people out there use credit reference agencies and long detailed credit application forms asking for references etc. In my opinion, these are a waste of time. It is much more effective to have short credit terms and use.
Advance and stage payments
We are design firm and we sell our creativity and technical know-how that basically equates to time. At the end of every month we pay salaries and overheads throughout the month/quarter. Cool.
So, we take on a new client, send them our contract that contains our standard terms of business. Here we specify the terms of payment that always involves an advance payment and further stage payments in advance of the work being completed.
Of course, we don’t start work until we receive an initial payment.
The boot is now on the other foot. The client is the one who is taking the risk by paying us up front and in advance of time spent on their project; we have the cash in the bank to enable us to function efficiently. I have to say I prefer it that way.
In all the clients we have now worked for only three have not been able to agree to the seven day terms.
So, what are you all waiting for?