Cash flow issues can easily bring down businesses that might otherwise survive. One of the most common causes of cash flow issues for small businesses and startups is slow paying B2B customers. This problem is exacerbated when the customer is large and sets their own payment schedule. Below, we’ve outlined 10 tips to help you as a small business owner get your large customers to pay faster.
1. Understand payment terms before taking On new business
In the euphoria of securing a new deal, companies often become hyper-focused on booking the order at all costs. Small details, such as payment terms, are often overlooked. Whenever entering into new agreements, no matter how fast they come together, you should always pause and get clarity on payment terms before final signing. Don’t assume because industry standard is 60 day terms that your new customer will honor this. They may push for 90 days or include an obscure clause that delays service completion an additional three weeks.
This issue is also important for existing customers when negotiating large deals. Existing customers will often ask for payment term extension in exchange for the large order. Furthermore, if your salesperson agrees to additional product changes after the initial contract was signed, it is important all business units, particularly billing, are made aware of these changes. Be disciplined and organized upfront so that there are no surprises when the invoice collection process begins.
2. Invoice promptly
This may sound obvious, but when working with complex product offerings delay invoicing is quite common. Think about your own vendors, would you pay an invoice with 30 day terms immediately if it hit your inbox 30 days after service? No, you wouldn’t. Don’t expect your customer to either. Companies don’t start the “payment clock” until invoice is physically entered into their systems. If you work with enterprise customers you should really be paying attention here. These companies are notorious for having complicated invoice approval workflows. In a good week, they will be lucky to pay a portion of the vendors who were owed payment the last week.
Now that you know what you are going up against, think strategically about how you can more effectively invoice on-time. If your customer is required to provide you information after service, but before invoicing, setup automatic email reminders so you don’t delay requesting it. Setup share drive folders where all the different business units can share key customer order information. Invest in add-on software that automates data population. The sooner you send an invoice, the sooner you will be paid.
3. Know the process to get paid
Every customer has a different invoice payment process. Some companies may require that you mail invoices to a P.O. box, while others ask that you send it to their AP email inbox. Also, sending the invoice is not always enough. Customers need to verify the service has been completed and the payment amount is correct. Understand if you, the vendor, are also required to provide underlying documentation (PO, IO, contract, etc) with your invoice.
Also, when working with a customer for the first time, be sure to include your W9 with the first invoice. This document is required for new vendor setup.
As a new vendor use this time as an opportunity to be naïve and do as much diligence as you can with the customers. Ask what are best practices to ensure timely payment and adopt these recommendations in your own process. Every detail matters when it comes to your cash flow. If you don’t take this process seriously, you will learn the hard way that even the smallest mistakes can result in delaying payment an extra 15-30 days.
4. Start chasing payments weeks before they are due
Outside of entering your invoice details when it is first received, your customer’s AP department may not have the bandwidth to review your invoice until the week it is due. This means you need to pro-actively engage with your customer’s AP department to ensure timely payment. A good rule of thumb is three to four weeks in advance for large payments (they most likely will require additional approval) and two to three weeks for smaller or recurring payments.
Send a polite email reminder to the AP Manager that your invoice is coming up for payment and that you are available to answer any questions she may have. There is a good chance the AP manager will not respond to this first email. Don’t be discouraged. Continue to follow-up at least once a week with calls and emails. Eventually, the AP manager will review your invoice and because you were pro-active will go the extra step to pay you (also see tip #6 on how to build the right relationship with the AP team). Many vendors do not have the organizational capabilities to follow-up consistently. Use this to your advantage to get paid before them.
5. Be realistic about early-pay discounts and use to your advantage
Another way for timely payments is to reward customers with an early-pay discount. 2/10 Net 60 is a common example. If the customer pays you within 10 days, allow a 2% discount off the payment amount. If not, full payment is due within 60 days. Many companies push back on early-pay program, citing margin loss will impact profitability. What these companies fail to realize, however, is margin does not pay the bills, CASH does. Sure, great margins make for great board meetings, but when payroll is due and cash is low, your board isn’t going to be the one explaining to employees how furlough works.
If you still aren’t sold on early-pay discounts, there are other ways to make the program productive. First, you can stipulate early-pay discount is only available if the customer makes payment on all your other past due invoices. This is called the “clearing house” early-pay incentive. If your company needs to show high cash balances for quarter-end reporting this can be a great tool. Second, renegotiate your vendor agreements to also include an early-pay discount for when you pay them. If your vendor program is structured effectively, your customer early-pay program may actually increase your overall profit margins.
6. Build a real relationship with the AP manager
Customer AP managers have a thankless job. They spend all day fielding calls from angry vendors who are screaming for payment. Don’t be one of these vendors. Instead, invest in building a real relationship with your customer’s AP departments. Get on a first name basis with the AP managers. Ask them non-work related questions such as holiday vacation plans, which colleges they want their children to attend, and how early the CEOs leaves on Fridays.
Another fun and helpful way to build the relationship is trading vendor horror stories. Whatever they will reveal to you, use a case study as the wrong way to solicit payment. Be sure to also ask what you can do to make their job easier (you be surprised how many vendors don’t ask this). Finally, always take time to thank them when they pay you. Once the AP team likes you, they will spend the extra five minutes looking into why you haven’t been paid yet. Continue to build the relationship and they will make sure your invoices get approved ASAP.
7. Identify and connect with the financial decision-maker
Even though the AP manager approves and pays invoices, they don’t always decide which vendors actually get paid on a weekly basis. A higher-ranking finance employee such as the CFO or Controller may be the one with this power. If you find yourself in this situation, leverage your AP department relationship to find out who the financial decision-maker is. Contact this person, introduce yourself, and begin to build a relationship.
Ask them if there are any issues with your current invoices, when payment should be expected so you can manage your cash flow accordingly, and what are best practices to ensure a frictionless payout for future invoices. Many companies don’t invest the time to understand the internal dynamics of a customer’s finance department. The ones that do take the time to learn this are the ones who get paid on-time.
8. Lean on your buyer when needed
You may find some customers’ AP / finance departments are completely unreachable. When this happens look to your buyer for help. Your salesperson most likely is very protective of this relationship so be thoughtful here. First, explain to the salesperson why this is necessary and get her buy-in. Then ask your salesperson to call the buyer and explain there appears to be a communication issue between your companies’ finances teams. Your salesperson can then ask if the buyer would be willing to look into the matter.
The underlying motivation of the call is for your companies to collectively get this past issue. Your company wishes to continue to provide great service to the customer without financial distraction. If your buyer values your company’s service, she will help as she realizes you have exhausted all other options. Once you are able to connect with the appropriate AP and finance department contacts, be sure to follow tips #6 and #7 to avoid this situation again. You want your sales rep and buyer and sales rep calls to be about new business, instead of collecting invoice payments.
9. Show up at the door
Some customers pay invoices by sending checks through the post office. This can add one to two weeks delay to receiving your invoice payment lingers in the snail mail system. Once received, you then on your own time have to physical deposit at the bank. If your customer is local, you can always offer to pick it up in-person. You may feel a bit awkward about doing this, but you save your customer postage costs and you avoid your check potentially getting lost in snail mail (yes, it happens).
This can also be a great opportunity to meet the AP team in-person and solidify the relationship. You may even find yourself being given a tour of the office and getting the chance to meet key executive. This type of relationship can even evolve you coming back again and sponsoring a customer lunch to show how supportive you are of the business.
10. Be flexible with partial payment
Sadly, not all customer relationships are rosy and great. You may have had the unfortunate experience of dealing with a customer that is experiencing cash flow issues. If you wish to continue to do new business with them, ask for a partial invoice payment. A customer may not have the cash to pay the full past due invoice amount, but surely they have the funds to pay 10%/25%/50% of it right now.
Customers that provide partial payment demonstrate that they are committed to working with you and wish to do so in the future. Likewise, you demonstrate that you value the customer relationship and are willing to be supportive of them during these tough times. Every week continue to work through partial payments to move the relationship forward. If the outstanding balance is large, discuss with the customer formalizing the payment program so you can get visibility on future payments. If the customer is unwilling to engage in the payment program, it’s a red flag regarding their ability or willingness to pay you ever.
These 10 tips are a good start to getting your large customers to pay faster. However, if you’re still having trouble with slow paying clients, Harper can help. Schedule a complimentary cash flow consultation with us today and find out why so many small businesses choose to work with us. Fill out your contact information here or call (310) 817-0376 to speak to a member of our team.