Investors, directors, banks, lenders, and suppliers all expect to see a return on their investments, loans, or supplied goods. Poor cash flow planning can disappoint your stakeholders, lead to suppliers placing your accounts on hold, and even cause your bank to withdraw your credit lines.

At a New South Wales (NSW) Business Chamber meeting last year, the Australian Small Business and Family Enterprise Ombudsman, Kate Carnell, identified late payments and their impact on cash flow as the most critical issue facing most Australian small businesses today.

Ineffective cash flow management isn’t just a short-term problem; it can also hinder your business’s future plans and growth.

The Most Effective Way to Take Control of Cash Flow

Avoid the pitfalls of weak cash flow caused by slow-paying customers. There are significant steps you can take to prevent and minimize their impact on your business.

Here are some straightforward methods to improve your business’s cash flow:

1. Establish Clear Terms and Conditions

Before initiating a new client relationship, ensure you have a comprehensive terms and conditions document for the agreement or potential deal. These terms outline the framework within which you conduct your business and provide protection against potential claims.

This could be a dedicated page on your website that you direct clients to for their agreement, or a more formal document they sign and return. It’s advisable to have this drafted by a legal expert or consultant, as it can involve complex issues.

Your terms and conditions should cover aspects such as refunds, payment terms, limitation of liability, dispute resolution, and key definitions.

2. Identify and Avoid Poor Payers Early

Request business references from new clients. While this doesn’t guarantee timely payment, it offers an opportunity to gather information and insights from other creditors. Additionally, consider purchasing a credit report on new clients.

3. Ensure Payment Details Are Unambiguous

Make certain that every invoice and all correspondence with your client clearly state all the necessary details for them to pay you for your products or services.

Verify that all your bank details are accurate and include all information required for payment, such as international details like your IBAN or SWIFT/BIC code if you have international clients. Each invoice should clearly specify the expected payment date and the consequences of late payment.

4. Make Payment Easy

Offer a variety of convenient payment options for your clients. Provide direct deposit and electronic bill payment services like BPay or Australia Post Bill Pay.

Integrate credit or debit card processing, direct debit options, and online payment services such as PayPal, Stripe, or eWay, choosing the methods that are feasible and most suitable for your business and your clients’ preferences.

Be aware that some of these payment methods involve transaction fees, so select the strategies that will best accommodate your clients.

5. Offer Incentives for Early Payment

Consider offering discounts for prompt payment. Many utility providers, for example, offer a small discount for paying on time, which can be a sufficient incentive for customers to pay promptly and save money.

Alternatively, you could implement penalties or interest charges for late payments. However, there are regulations governing such charges, so ensure you understand and comply with these before communicating them to your clients. Generally, offering discounts for early payment tends to create a more positive customer relationship.

6. Request Deposits or Prepayments

If it’s standard practice in your industry or acceptable to your clients, requesting deposits or prepayments can be an effective way to improve cash flow.

This practice is particularly common in the services industry, where clients often pay a deposit to secure future services or products.