More Advice for the Cash-Strapped Entrepreneur
by Myrna Rodriguez-Co
A cash-short business owner, desperate that he didn’t have enough money to meet the company payroll, called in his employees to his office to explain to them why they wouldn’t get paid on time. The workers came as summoned – angry, and armed with guns. The businessman narrowly avoided being shot by escaping through a window.
The episode, a scene from the movie, “The Mousehunt,” though comic- hyperbolic, underscores the saying that in business “cash is king.” If this is true, then cash flow is sacred. Maintaining a healthy cash flow is an imperative to keeping the peace in the “kingdom”that is your business enterprise.
You must have observed that the movement of cash in your business is cyclical. You use cash to produce goods or services which you sell to your customers who pay you cash and which you again use to produce goods or services. This cycle, which goes on and on, is known as the cash flow. It is every businessman’s goal to have more money coming in than flowing out as his business goes through cycle after cycle.
Unfortunately, the average small businessman today finds the reverse taking place in his business. More money goes out than in! This is blamed on the poor economy, the competition from cheap goods from China, the failed mutiny, etc. etc. But whatever the reason, the businessman need not get himself shot just because of a cash gap. He has various options, which boil down to delaying outflow and improving inflow.
Delay outflow through better terms from suppliers.
If you are a typical small businessman, you would define “best terms” in terms of time – the longest or the more extended the payment terms, the better. This will allow you to delay your cash outflow and improve your overall cash flow.
Suppliers who give you credit usually require payment in two weeks to a month. I say usually, not always, because there would be some, not all, who would be willing to extend better terms. Don’t assume that suppliers’ terms are non-negotiable. So if you’re not sure, ask. But be ready to justify your request.
Better terms, however, is unlikely to be extended, unless you have established a good track record with the supplier, in particular and a reputation for credit-worthiness in general. You also stand to have a better chance for better terms if you order in volume or give assurance of continuous orders in future. You would then be a valuable customer whose patronage suppliers will vie for.
All these seem to leave in the cold a new entrepreneur who has yet to establish a business relationship. If you are one, don’t despair. You simply need to pay in cash your first few orders. In months you would have begun to establish the track record you need. Take care, however, not to tarnish the record you have painstakingly built. Remember, it’s easier to build from nothing rather than to restore a blemished name.
Supplier terms may also refer to discounts. Some suppliers may be willing to take one to two per cent off your invoice if you pay within a specified period of time, say, within 10 days. This contradicts the rule of deferring cash outflow as long as possible. However, see if it is more advantageous if you paid your bill early to take advantage of the trade discount.
Improve inflow through better management of receivables
On the other hand, look at yourself from the other end of the supplier-buyer relationship. How are you as supplier-creditor? If you are always cash-strapped, it might be that you have let your own billing policies and procedures go to pot. Here are ways – adopted from the SBA Women’s Business Center -- to a better- managed billing system.
- Set your billing policies – Before your customers set them for you, you need to set your own billing policies and procedures. Whenever you release your goods to customers without payment, you effectively lend money to them. Be selective who you lend to. Find out if they are credit-worthy. Do a credit check. Ask for references and get in touch with these references. Talk with the customers directly. Find out why they switched suppliers. Be cautious and firm and follow your gut instincts about a potential customer.
Take the time one day to put down in writing your company’s billing policy. It should include the following: Who will you offer credit to? How much credit will you offer? How will you determine your customers’ credit-worthiness? When will your bills go out? In what time frame will you expect payment? How will you follow up if payment is not made?
- Send your invoices promptly – Never let your goods leave your premises without an invoice. It may be a bit of a nuisance, but watch as your collection rate improve dramatically. Why? Because if your customer receives your invoice weeks after they have received your product, they may feel there is no reason to pay quickly. They will think that if you can afford to wait to bill them, you can also afford to wait for payment.
- Ask for deposits – If you know a customer to be a late payer, don’t hesitate to ask for a deposit or downpayment Alternatively, you can ask customers to sign a payment contract. Knowing they have signed a written agreement would make it harder for them to put off payment.
Follow up unpaid invoices – Follow up unpaid invoices promptly and conscientiously. Remember your customers will size you up quickly (as undoubtedly you have sized up your own suppliers). Be sure they see you not as a pushover but as a toughie who expects to be paid pronto. If they do, then they are likely to put you on top of the list when prioritizing their payment schedule. When following up, set a payment date in your letter and call promptly on that date if the bill remains unpaid.
(For inquiries, please e-mail info.issi@up.edu.ph.)
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