The economy is rebounding, business is good, and your company’s revenue is growing – all the makings for a boom that would mean tremendous growth for your company.
If you are a financial manager, however, this is cause for a bit of concern. We all have heard the adage “cash is king,” and growing companies need cash. In today’s economy, your customers are growing just as fast as your company is, and there is a constant struggle in getting customers to pay early, pay on time, or to even pay at all.
Negotiations are happening every day at your company, not just when you plan for them to happen. Whether you are calling to request payment for an invoice, to restructure payment terms, or to check on the status of an order, every time you contact a customer, it is an opportunity to get more cash.
That being said, there are a few things to keep in mind that will ensure your company keeps its advantage and ends up with more cash:
Stay in Control, Think Like a CFO
Negotiation is about leverage. The party with more leverage is more often than not the party that wins. Though it may not seem so, financial managers are in a position with the most leverage when it comes to the customers. They control the ability of that customer to continue doing business with your company. Financial managers set credit limits; they can put an account on hold, and they are responsible for making sure all of the dollars end up in the bank.
Increasingly, financial managers are encouraged to get more creative in how they encourage their customers to pay on time. After all, those increased sales numbers are only as good as the payments promised by the customers.
Staying in control is the first key to maintaining leverage, and few have more control than the CFO of the company. Every financial manager, regardless of industry, can benefit from taking the perspective of the CFO when approaching a negotiation opportunity with a customer.
In fact, Kimberly Clark’s CFO Mark Buthman recently encouraged his 1,600-person finance organization to “think like him”. This means in every negotiation situation, imagine if you had the CFO of your company sitting next to you. What would the CFO do? How would the CFO handle a customer who is requesting an increased credit limit or a payment extension? What is in the best interest of the company?
This is the right mind-set for staying in control of the conversation and moving the cash flow in your company’s favor. And now that you are thinking like the CFO, what kind of creative ways can you get the customer to pay?
The Longer the Terms, The More Risk Your Company Takes
This may seem like a no-brainer, but it is worth mentioning. Whether you are giving your customers 5-day, 15-day, or 50-day terms, extending terms to a customer for any amount of time means that your company needs to float the balance in the meantime.
Shorter terms lead to better cash flow, and the terms you grant a customer should be dependent on your history with the customer and how able they are to pay the debt.
Here is an example of terms structure for a small to medium sized business.
For high-risk customers, require cash-on-demand, or make them pay 50% up-front and require the other 50% in a short amount of time like 5 – 10 days.
For medium risk customers, require a 20% deposit up-front and give the customer 15 days to pay.
For low risk customer, provide a standard net-30 for all invoices, and consider offering a credit limit.
Regardless of the structure your company chooses, the idea is to associate shorter and stricter terms for higher-risk customers. Once the customers have proven that they are capable of paying on time, you can consider adjusting their terms to something that is more agreeable to their cash flow.
Treat Your Best Customers Even Better: Incentivize Payment Through Early Payment Discounts
Many companies practice using discounts to lure early payment from customers. The concept is simple: the earlier a customer pays, the higher the discount that will be applied to the order.
For example, let’s say your company provides net 30 terms to its better customers. If the customer pays within 10 days, you can provide a 5% discount. That means $500 off the order for every $10,000 in payables. While this may seem like a steep discount, consider the value of having cash in hand over the time and effort spent chasing the money for another 15 – 30 days (or even worse).
Discounting can be very successful if applied correctly, and it is extremely powerful when negotiating payment terms with your customer.
Communication Leads to Increased Cash Flow
Little would get done in business without effective communication, and this holds true for your relationship with your customers. You would expect your customer to give you a heads up if they were thinking of moving to another vendor, or if they had to delay payment for some reason. Think of customer relationships as partnerships, and work with your partners to help them succeed.
Too often, companies do not call their customer until things have gone bad, payment is late, or there is an issue with the relationship. Calling early to request payment often times leads to payment. This means you can get early payment from a customer without having to give up profit.
Talking to your customers early and often will give you more information about your customers’ situation. This could be the leverage you need to improve cash flow for your company.
If Possible, Secure Your Debt
Many industries provide a remedy for securing receivables, often in the form of a lien. For the automotive or consumer products industry, the UCC lien is a protection mechanism for suppliers to ensure that they are paid.
The construction industry, however, has one of the most powerful remedies available to suppliers and contractors in the mechanics lien. As owners shift financial risk down the chain, cash flow becomes tenuous for lower-tiered partied like subcontractors and material suppliers.
Luckily, the mechanics lien allows contractors and suppliers to all but guarantee payment on a project. Here’s how it works: a material supplier sends product to a jobsite. The product is installed and is not paid for. The supplier can make a claim against the value of that property for the amount that is owed. This claim allows the supplier to foreclose on the property, forcing the sale of the asset to recover the money owed.
Liens rarely result in foreclosure because people generally do not want their properties sold. This remedy gives the supplier or the lowest-tiered party on the project, the control to negotiate firmly with customers.
What remedy does your industry have for securing receivables? What else do financial managers need to before negotiating cash flow?
About the Author:
Martin is the Director of Business Development at zlien, a platform that reduces credit risk and default receivables for contractors and suppliers by giving them control over mechanics lien and bond claim compliance. A graduate of LSU, Martin was the VP of Feelgoodz and Co-Founder of GiftMEO before joining zlien. Martin interacts with company users and partners daily to help empower businesses to get what they’ve earned. He writes about cash management, best business practices, and how to implement technology in receivables management. Connect with him @themartinroth and LinkedIn.