Cash-Flow is the answer to all your woes

The First of The Ten Reasons You're Not Making Enough Money in Your Business

Reason 1:

You're trying to run a bank (instead of your actual business) and how to stop doing so

"When they just don't pay and they don't respond or they 
don't keep their promises, you are being dis-respected 
and allowing others to disrespect you once, means you'll be 
disrespected again and again. That feels yuck, 
it's bad business and you do not deserve it."

This is the first episode in my weekly series called : The Ten Reasons You're not Making Enough Money in Your Business"

Here is the introduction to the series with an outline and the structure of the ten weeks.

For my sins I have spent over 30 years in and around small business. I've seen many businesses come and go and I've gone through a number of ups and downs in business myself. The one thing that is beyond doubt, is that nearly every time I've experienced or witnessed significant business stress or business failure, there's been a common cause:

The inability of the business owner to manage his or her cash-flow adequately

And just so we're absolutely clear, when I myself have experienced such stress or failure in business in the past, it's equally been my own lack of skill in cash-flow management that's been at the root of the problem.

Small Business Owners want to Fix the World

Small business owners have one fault above all and that is that they want to fix all the problems of the world, even the ones that have nothing to do with them, such as their customers cash-flow. For some reason, many small business owners believe that if their customers are having trouble paying their bills, it somehow becomes their own problem to solve and they extend more and more and more credit to those customers.

Suffice to say: STOP IT.

When you extend more and more lenient credit terms to your customers and especially when you don't ensure you get paid inside reasonable credit terms, you're trying to run a bank instead of your actual business and I can assure you:

You Suck as a Banker

Whenever I start working with a new client I always ask them to show me their "Aged Receivables" report. It's a report that can easily be run from your bookkeeping system (ask your bookkeeper or accountant) and it shows you who owes you what and for how long they've owed it to you.

If you run a report like that in your own business, there are two things to look for:

1. How much is owed to you for more than 30 days
2. How much is owed to you in total

The first number simply tells you who you're running a bank for and the second number will give you the answer to the question:

How come I've never got enough money to pay my bills?

It's not uncommon for me to look at the Accounts Receivable report of a business and find that more than a full month's sales is outstanding outside 30 days. If your business has more than a month's revenue in outstanding invoices, it's not hard to work out where your stress is coming from and how come you can't pay your bills. Your money is in other peoples banks. It doesn't matter how much you invoice every month and how much profit you make, as long as it's not in your bank account you can't do nothing with it and you might as well not have it.

Tell me something I don't know

Now I am well aware I'm not telling you anything you don't know. The real problem is that you don't know what to do about it. It takes time you don't have to chase outstanding bills; You're afraid to annoy your customers by hassling them for money; It's awkward to have the money conversations when you're in the middle of other work with the client; You have empathy for their cash flow situation (after all you've got the same problem yourself); You're worried that by hassling them too much they might go elsewhere; You're concerned about giving customers "last warnings", because if you do, you have to follow through and who wants to spend money with solicitors over outstanding bills, etc etc.

I get it, I do, I've been there myself. But I have two words for you:

1. Respect
2. System

Respect is about this: When people don't pay you, repeatedly, without talking to you about it, they don't respect you and you are letting them dis-respect you. There is absolutely no reason why you can't be flexible with a client who asks you for an extra week or two to pay a bill. In small business we all get into tight spots from time to time and it's good business and being a good human to be empathic to those situations. But when they just don't pay and especially when you send them a reminder and they don't respond or they make a commitment to pay by a date and then they don't stick to their commitment, you are being dis-respected and I firmly believe that we should not allow others to treat us dis-respectfully. Allowing others to disrespect you once, means you'll be disrespected again and again. That feels yuck, it's bad business and you do not deserve it.

The System to fix your Cash-Flow

And System is about this: The way to manage your cash-flow problems is by developing a simple collection system. A system that you design and then delegate to someone else in your business.

A collection system might involve 6 steps for example (please note this is a simple example collections system, you may want to vary some of the steps or add more steps or reduce steps in your business):

Step 1: At the end of each week, check which invoices were due. Send friendly reminder email #1 to all customers who have an outstanding amount, overdue and have not requested an extension of time for payment.

Step 2: At the end of next week (week #2): Check on all those who were sent friendly reminder email #1. List those who have not paid, send reminder email #2, request payment by middle of next week.

Step 3: On the same day as step 2, make phone call to customer, speak to appropriate person, confirm the outstanding amount, ask if a copy of the invoice needs to be sent again and Most Importantly: Ask for a commitment of payment and by what specific date payment will be made. Within reason accept this commitment as a promise, and make a note of the date of promise and payment. (This step may be the one step in the system you don't delegate, at this specific point in the collections system it may be that you think it is useful for you to make this phone call yourself. If you do, it will only be because the person who runs your collections system gives you a name and details of the debt and asks you to make the call, that day)

Step 4: On the day after the date of payment committed to by the client in step 3, check if payment has been made. If not, immediately send stern final reminder email #3, stipulating a date by which payment is to be made, or else the debt will be handed to your collections agents (XYZ mercantile agents, see note about collections agent below), and that when the debt is passed to the collections agent all collection costs will automatically be added to the outstanding amount.

Step 5: On the day after the final date for payment, stipulated by you in step 4, check if payment is made. Make a phone call or leave a message, advising that the outstanding debt will be handed to XYZ collections agent at the close of business of that day and that all collection costs will automatically be added to the outstanding amount from here forth. Also send a simple factual email (email #4) confirming this phone call and actions that will be taken.

Step 6: Send the debt to the collections agent first thing the next morning after making a final check on the payment. Send email #5 to client confirming that all future communication about the debt is to be directed to XYZ Collections agent reference number XXXX

NOTE on collections agencies: Finding a collections agent and establishing a relationship with the agency is a crucial component of an effective collections system. One of the reasons many business owners don't follow through on their "last warnings", and hence often don't end up sending them is that they don't have a collections agent they can just call on easily and also they are concerned that if they send the debt to the agent they are going to lose a significant proportion of the outstanding debt to the lawyers or the agency's fees.

The secret to an effective collections system therefore is to have established a relationship with an agency (or layer) who specialises in debt collections, so that all you have to do at step 6 above, is send them an email with a copy of the invoice and copies of the various communications from your collections system, to get the ball rolling. And equally important, I suggest that you find a collections agent or lawyer who is prepared to work on fee on collection only and who can advise you on wordings to use in your collection systems that allow them to add their fees to the outstanding debts they set out to collect. This way you are less likely to lose out. It is true that it may not be possible to enforce the debt collection costs in front of a court, but only a very small percentage of debts end up in front of a court. Most are paid or settled long before that.

Every client who I've worked with in the past 15 years who has implemented a system like this, delegated it to someone else in his business and insisted on it being run like clockwork, like a machine, reduced his outstanding receivables and the business stress, by at least 50% in a matter of a few months. It works, trust me.

Next steps:

1. Take some time to find a trustworthy reputable collections agent. Ask for referrals, search on google, ask at your local business networking organisation (www.BNI.com.au) or attend some local Business chambers and ask around.
2. Set some time aside in the next couple of weeks and design your own collections system, along the lines of the 6 steps above.
3. Decide who is going to run the system for you and delegate it to him or her and agree on a monthly check in and report.
4. Push the button and watch the money coming in.

Next week: episode #2, You don't know the value of what you provide