I was recently doing a private coaching session with a client who said to me, I have huge accounts receivable, but no cash in the bank to pay my vendors. How in the world do I fix this? And I thought it was a very, very interesting question. As we dove deeper into the problem (because the company did have really strong sales) their accounts receivable looked fantastic.
But, the problem was in their payment terms. They were selling systems that require physical hardware. When they would sign a deal for a new $50,000 system they were only requiring their client to put down a $1,500 deposit. What happened as a result is they were having to “float” all those upfront hardware costs to their vendors because their vendors, which was killing their cash flow. So, even though they looked good on paper, the reality is that they were very, very cash poor, and it all came down to their payment terms.
If you’re experiencing the same problem, I would really urge you to look at your payment terms. How much money when you sell your product, or your service does your client have to put down initially? Do you ask them to put down a large upfront deposit, or do you let them wait until the end, and pay the balance in full later? Very, very bad for your cash flow, especially if you have to come up with hard costs that you might have to cover to deliver your product or service. You should absolutely never be out that money. You should always be getting that upfront, so you’re not having to float that for your client.
Plus, leaving a huge balance until the end for your client to pay … It actually makes it a lot harder on them because now the client has to budget for this huge payment. And, if you’ve ever had to budget for a huge payment, you know how hard it can be. You’re actually setting your client up for more success by breaking that out into smaller payments, making it easier on them and their cash flow. Plus, it’s going to give you the money you need in your bank account to operate with a lot less stress and headache.
The concept of better payment terms is easy to understand, but implanting can be tough. Especially if you are afraid of the backlash from your clients. This is something that can be addressed, with a little help.
What’s Next: Do you need help? Schedule a call with a Profit Advisor. Our complimentary one-hour session is the first step towards having a financially solid business. Schedule a call today.