Working capital, or funds to run day-to-day business operations, pay employees, vendors and utility bills, is at the center of any successful business. Small business owners, who often work with limited capital and rely on timely payments from customers to keep their cash flow cycle going, often find themselves in the midst of a cash crunch brought on by inordinate delay in invoice processing by B2B customers.
If your small business has been bearing the brunt of clients repeatedly missing payment due dates, here are three tips to increase your cash flow and avoid going broke mid-month.
Tighten up your accounts receivables system
Small businesses that serve business clients are often left waiting for their invoices to be cleared for weeks on end. A couple of weeks’ delay is inevitable, even if you gave the customer 60 or even 90 days’ credit. Not receiving payments on time is one of the top reasons SMEs have to contend with limited cash and may even have to let go of new business owing to lack of funds.
An excellent way to tackle this problem is by improving your accounts receivables process. Introduce incentives to reward clients that pay on time, enforce a late payment fee for select clients, and send friendly but firm payment reminders once the due date is near or has passed. If you can afford it, stop doing business with a client that repeatedly defaults on payments.
Explore invoice factoring
If you’re frequently stuck for cash and are not in a situation to dictate payment terms to B2B clients, or if you need instant funds to take on a large order, consider selling your accounts receivables to an invoice factoring company that will pay you up to 90% of your unpaid invoice for a small fee and then follow up with your client for invoice processing.
If you’re new to invoice factoring, pick a company that offers factoring services for your specific industry niche. For instance, trucking factoring companies know how payments work in the freight and transport industry and will tweak their offering accordingly.
Avoid late payment penalties
Establish a streamlined and firm payments process to pay your utility bills and credit institutions on time to avoid needless late payment penalties and fees. The key lies in creating a proper accounting process right from the start and firmly conveying to your accounts division that late payment charges should be avoided at all costs.
Even a $50 minimum balance charge by your bank incurred frequently adds to a considerable amount over the long run. Additionally, you may have vendors imposing late payment fees when their invoices are not cleared on time, and this figure could run into hundreds if not thousands of dollars over time. Small business owners can certainly do without money bleeding out from such routes.
Indeed, to have enough funds to pay off your vendors, utilities and creditors, you need to have a robust accounts receivables system in place—as explained previously.