When we had more than $20,000 in accounts receivable and less than $2000 in the bank, I made the decision that has prevented cash flow imbalance ever since. I immediately stopped accepting work from this person. I began stating my own payment terms early in the conversation with other prospective clients. I required much shorter terms than anyone else. When a large company would tell me that their “policy” is to pay at 90 days, I said my policy is payment net 30. If they wanted my services, they would have to accept my terms. And they did. I did not have one client choose another provider because of my payment terms. It took many months of nervous waiting to get to where I no longer had a backlog of accounts receivable, but it has never happened again.
Conventional Wisdom is Disastrous
My solution to cash flow imbalance surprises many company owners. That’s because it’s against conventional wisdom. Conventional wisdom says pay your own payables at the very last minute and demand your receivables early. If every company practices this “we win-you lose” approach, no one ends up winning.
I counsel Trivers Consulting Group clients that to bring cash flow into balance, you must start early in the sales process. Whether your sales process takes a half-hour, half a month or half a year, when you talk about payment terms early on, you’ll make more sales to perfect and good fit buyers, and the others will drop off. That’s more than okay, it’s necessary for your company’s health and your own well-being.
Once a buyer is interested in doing business with your company, and they’re getting excited about the value your company will deliver to their company, you need to talk about terms and conditions. It shouldn’t be hard or uncomfortable. It is no different than the other specs or requirements, except that too many sellers make it different.
Let’s imagine the conversation goes something like this:
Buyer: We’re interested in your Handy-Dandy service. Tell us more about it.
Seller: The Handy-Dandy service will enable your company to excel at customer service. Excellent customer service is the Number One driver of repeat business. We analyze your current process, recommend a customized solution, install it and train your people. We do follow up for 30-60-days. Our terms are 50% of the fee paid upon contract signing, and 50% paid at the time of final installation. We guarantee our work.
Buyer: Thank you. We’re excited about getting started. Please send us a contract. We’ll sign it and remit our 50% payment.
If you do not include a statement of your payment terms in the very earliest conversations, it gets harder and harder. When the seller is defensive about it, the buyer builds up their own defenses and objections. When you include your terms up front, the buyer can discuss them just as they would any other element of the prospective purchase. You do not have to allow changes, or you might agree, but the fact that you’re talking about payment terms brings the temperature down for both your company and the buyer.
“We Were Almost Driven Out of Business”
I met the CEO and management team of a company that was struggling mightily with cash flow. They’d gotten themselves into the worst situation: they had to pay their own suppliers upon delivery, but they didn’t expect payment from their customers until they delivered, which could be three months later. They’d use credit to make up the difference and now they were out of credit.
They sought advice from a cash flow expert, who gave them some tips about managing the current situation. But that person did not go to the source of the problem, which was that they never incorporated a matter-of-fact statement of their terms early into the conversation about a sale. They were so resigned to the disparate payable/receivable imbalance that they didn’t even think about bringing it up. This was another one of those “that’s the way it is” situations that get people into trouble. They were worried about being driven out of business.
While there is little they can do to change the terms of past sales, they can start immediately to improve the terms of future sales. We discussed how to change their conversation with prospective buyers to state, without fear or defensiveness, that the buyer is required to make a 50% payment of the total order price upon contract signing. Another 25% is due in 30 days. The final 25% is due upon receipt of the order. This sequence will improve the balance between their payables and receivables.
Improve Your Cash Flow
Cash flow imbalance is near-paralyzing for business owners. It consumes your thoughts day and night, preventing your from growth and innovation.
Commit to improving cash flow starting today. Review every single instance when you talk about payment terms. Do not accept unfavorable terms. And if you want to get paid in a timely manner, do not decide that your company can drag out payables to your own suppliers. They are also working hard to serve you and need their own cash flow to be in balance.
Cash flow should never cause a company to go out of business. If you’re interested in improving your company’s cash flow, I can help. Give me a call and let’s get the conversation started. 703-801-0345