In this series of articles, you will learn how to effectively manage your working capital cycle, WITHOUT having to borrow from external sources of funds. It is a secret which not many small businesses know about. The reality is that borrowing external funds is the most expensive way of managing working capital. There are other ways of getting around this situation, without having to dip into an overdraft or utilize invoice discounting by selling your invoices to fund your working capital cycle.
As a small business owner, it is your responsibility to ensure that you manage your working capital as best as possible, because, as a growing business, you will continue to experience great difficulties managing cash flow even though you may be profitable.
If you resort to business loans, finance from banks and NBFCs, or working capital financing, then there is always the burden of owing someone else which will be in the air. That is not to say that you should be utilizing your own funds, but a cheaper source of funds where there is a lower burden of repayment. Remember that there are loads of additional forms of working capital financing which you should be looking at, and they mainly come from your stakeholders.
Please note that your stakeholders are very important to your business, and whist these tips are good for working capital management, they should not come at the expense of ruining relationships with good stakeholders. Always be prepared to discuss matters with them and you will be surprised at how open they are.
Managing Working Capital Cycle: Your Customers
Your customers are extremely important to your business – after all, they purchase from you, and allow you to generate revenue/turnover which pays expenses in your business. But sometimes, securing that large client may prove to be a bigger headache, simply because they take forever to pay. It is reported that Indian businesses take the longest in Asia to pay invoices issued to them, upon being granted credit terms. All too often it feels a little like this:
There are a variety of solutions to help you get the most money out of your client to be able to manage your working capital effectively. Remember that in most cases, you need to do as much as you proactively can to ensure payment comes from them.
Here are a few which we have seen being used.
Billing in advance or early as possible –
Learn to manage what you can do from your end versus what your expectations are from your clients’ end. If you require your customer to pay you as quickly as possible, then it is your responsibility to invoice them as quickly as possible. If it is feasible to bill some customers in advance then do so, especially repeat service customers on the B2C side like gyms or security service providers.When you do bill your customers, make sure that there is proof that they have received the bill. An example is to get a physical copy stamped as received, but other examples could be acknowledgements received on email.
If customers are operating on credit, price this in –
It is not uncommon to charge even 10% higher for a customer who pays you after 45 days. If your product or service is valuable enough, then consider this pricing policy, and then offer your customers a small discount for early payment, and see what happens. Check out this impressive video for more information on this.
Send regular billing reminders –
A simple billing statement sent to the customer helps break down the obligations due from them as well as remind them that certain invoices are now due for payment. If you keep a remittance note, it also serves as a helpful reminder for your customer to make the payment, and send the slip back. Make sure to include the following in the statement:
- Terms of payment should be shown clearly when the payment was due from the customer.
- Number of days passed for the outstanding invoices
- Description box stating the urgency of the invoice which needs settling.
- Full list of contact details, to ensure that the customer can contact you using any mode whatsoever.
Establish a process for debt collections –
It is always important to ensure that this is done. Whilst no one hopes that this will actually happen to their business, it will one day, and it is important to be prepared so as not to waste unnecessary time. Ensure that you remove yourself from the situation as much as possible, and keep this part as emotionless as possible. As difficult as it is to accept, it is only business, and getting personal may only leave you frustrated and less likely to get your money back. Get legal advice first, and let the lawyers handle the situation. It can start with something as simple as a legal notice, which is very likely to result in payment.
Consider withholding your services unless payment is made –
This is only if there is significant leverage with your customer, and also needs to be considered alongside the amount of direct costs you are spending in relation to the client. For example, providing a Software as a Service product has very low direct costs to you once you have sold it to the client. But maintaining a customer’s website may be a lot more demanding, and so you need to remove resources from non paying clients as soon as possible to avoid unnecessary costs piling.
Ensure that the customer has accepted order fulfillment –
You need to receive acknowledgement that you have fulfilled your requirement in terms of delivery of a service or a product. That way, there are no issues around non payment due to problems around fulfillment of your side of the order.
Show appreciation of their business! –
Sometimes it is important to remember that there are people on the other side, who have their own fair share of problems to deal with. A friendly smile and a conversation goes a long way, especially if you have someone within the business who you know personally, and can reach out to from time to time to get payment made. Regular contact with your customers ensures that you not only are keeping good relations (so that the customers like you enough to pay you on time), but also allows you to pick up on any warning signs that your customer may be going through a rough patch, and thus help prepare you to deal with future orders or delays in payment. If customers are indeed going through a rough patch, depending on the relationship you have with them, you may be able to negotiate part payments or any other mechanism of getting your money out.
Prompt payment is in your control
It’s no fun chasing debtors, but it’s part of life for most small business. Unfortunately, you can’t – and shouldn’t – rely on your clients for prompt payment. And you should also be aware that this is probably not your core competence, but it is certain important for your working capital cycle.
You can take control of the situation with just a few changes to how you act and react with invoicing and chasing payments. These steps will improve cash flow and working capital cycle and, if you automate them, your late payment headaches will diminish. You’ll spend less time chasing money and more time making it. The choice is yours.
If you are a small business owner and registered under the MSME Act, it is really important to know your rights when it comes to collecting what is rightfully owed to you. Also, we understand that business needs to continue, and that growing businesses often suffer from a lack of working capital due to huge growth and clients who get trade credit. If you would like help wih invoice discounting or any other short term/long term loan, get in touch with us.