Cash Flow Karma

For most small businesses, there will come a time when cash is tight and you struggle to pay your invoices. It's a sobering thought and so is the idea that if you pay late it could force a chain of businesses to do the same, initiating a cruel cycle. Avoid cash flow karma by taking steps to positively impact the payment cycle.

As a small business owner it's easy to get caught up in your own cash flow issues without recognising that your suppliers could be in the same position. If you don't pay on time, you're potentially risking their business and their suppliers business and so the cycle continues. The first step is acknowledging the effect your late payment could have on other businesses and the second is to do what you can to positively impact the payment cycle. One of the best ways to do this is to pay your invoices on time however; this is easier than it sounds and in reality, it isn't always possible. After all, you don't have an unlimited supply of cash to pay invoices so it is important you manage your payments (and relationships) effectively. This may mean adjusting your perspective.

During the June quarter of 2010, Australian businesses took an average of 53.4 days to pay invoices, and while this was four days better than the previous quarter, it was still significantly longer than the standard 30 day payment term. More than half of all Australian executives also indicated that late payments were having a negative impact on their business, a rise of 17 percent on the March quarter. With figures like these it easy to see how just one or two firms paying their bills late can create a vicious cycle.

For more information on the latest payment figures read Lagging payments hurting half of Aussie firms >>

Avoid cash flow karma - use the following advice to positively impact the payment cycle.

Pay promptly

It's a cash flow fundamental that all small businesses should know - pay your bills promptly. It primarily ensures you maintain a solid business relationship with your suppliers and it takes one link out of the late payment cycle. By paying regularly, your supplier will begin to value your business and the trading relationship it creates. Such a relationship can help your business secure a better deal such as a regular discount or prompt payment discount. However, it is important to remember that your supplier has no obligation to provide such discounts so appreciate the privilege if it is offered.

A secondary benefit of these relationships becomes obvious when your business is short on cash. Compare the relationships you have with your customers - those that regularly pay on time and those that don't. If your customers fall on difficult times you'd like to think you could support them both, but if push came to shove, you'd undoubtedly choose your reliable customer over the not-so-reliable payer. Therefore, it's in your best interests to become a valued customer so your suppliers will be more open to negotiation if the need arises. This support could come in a number of forms, including extended payment terms, a waiver of a late fee or delays in stopping deliveries despite non-payment.

Also remember that late payments can affect your credit report, potentially making it more difficult to access credit. Each time you apply for credit, whether for a bank loan or trade credit, your credit report is checked to determine your payment history (being a small business a credit provider could check both your company report and your individual credit file). With a chequered history you may struggle to access credit or be charged a higher interest rate or other fees.

Communicate, communicate, communicate

Have you ever taken the time to discuss what your suppliers want or need in regards to payment? Alternatively, does your supplier know what you require to ensure prompt payment? Before you establish a trading relationship with a supplier, it is advisable to take some time to discuss payment terms, payment methods and any other preferences. But, if you didn't do that at the outset of your relationship you haven't missed the boat -it is never too late to start. A lack of communication regarding payment agreements can result in a number of mistakes and delays. Therefore, it is in both your best interests to take the time to make sure you are on the same page. Just remember to be flexible - there is nothing worse than trying to deal with someone who is not open to alternatives.

Also, talk to your supplier early if you have any issues or queries about an invoice. This will go a long way to ensuring the problem is fixed before the due date and payment can still be made on time. Similarly, if you believe something is going to prevent you making payment by the due date, let your suppliers know immediately. If you are honest and assure them your intention to pay the full amount, they may be willing to adjust the due date or offer incremental payments. But if you don't communicate, you don't know. By doing the right thing by your suppliers and communicating fairly, they will be more likely to do right by you if or when you need it.

Now that you have discussed payment terms with your suppliers, take the initiative and do the same with your customers. Let them know what you expect of them and what they can do to help you process their payments quickly. Discuss payment terms, payment methods and any other preferences for both sides of the relationship. Also, try to make it easy for your clients to pay you. The easier you make it, the more likely they will be to pay on time meaning more available funds for you to pay your suppliers.

For more information on what you can do to ensure faster payments visit Get paid faster using smarter invoicing >>

Just as it is beneficial to build a relationship with your suppliers, it is also in your best interests to forge a relationship with your customers. Remove the anonymity from the customer/supplier relationship by speaking to the same person each time you correspond. Adding a personal relationship into the mix will make it harder for them to let you down and open the communication lines should there be an issue. Ideally, you want your customers to feel comfortable approaching you when they have a concern with an invoice or are struggling to find the cash to pay. Not only will this prepare you for the possibility of late payment but it means you can work on a mutually beneficial solution so you still get paid.

While you can't control your customer's actions, you can avoid cash flow karma by treating your suppliers and customers favourably and making a positive on the payment cycle.

For more tips on generating healthy cash flow visit Positive cash flow >>

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