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Cash flow management for small business: Payment terms to improve your process

2022-08-08 00:00

Key points

  • Doing due diligence before extending credit
  • Improving your payment terms
  • Being prepared for opportunities

Offering credit to your customers may improve their experience of doing business with you, but it’s important to prepare for the risks with a resilient cash flow plan.

These seven steps can help you strengthen your cash flow, plan effectively for the future, and eliminate debt problems before they occur.

1. Consider whether you need to offer credit at all

Depending on the type of business you run, you may be able to reduce the number of credit accounts you offer and if possible, avoid extending credit during uncertain times, or at all.

Getting payment at the point of sale improves your cash flow and eliminates the possibility of having to chase people for payment. Accepting credit cards can be a straightforward way to offer your customers credit.

Extending credit to customers can reduce your cash cycle - a key component of a successful business.

2. Require an application form before extending credit

If you're going to extend credit, your customers should complete a credit application.

Ask a supplier if you can use their form as a guide or get a free sample from a local debt collection agency. Include your terms of trade and ask your lawyer and accountant to suggest improvements.

Check credit referees to make sure the customer has paid promptly in the past. If the customer refuses any of your terms, it’s your business decision whether to take the risk of supplying on credit.

If in any doubt, ask a credit agency for a credit check on a prospective customer.

3. Revise your payment terms

Customers won’t pay until they’ve been invoiced, so invoice as soon as you've made the sale.

There’s no need to stick to the tradition of ‘payment by the 20th of the month following invoice date.' Changing your payment terms to 'payment within x days' may help improve cash flow.

You don’t want to wait any longer than necessary before you know there’s a problem. In the meantime, the customer may have bought more from you, adding to their debt.

4. Reconsider statements

Repeated end of month statements simply summarise what the customer owes.

This extra administrative step costs time and money, so why not eliminate it by stating at the bottom of your invoices in bold: ‘Please pay on this invoice as no statement will be sent.'

Some customers – typically larger ones who receive multiple invoices from you – may try to insist on end of month statements, but most will happily pay against an invoice.

5. Don’t be afraid to cut off credit

Adopt a consistent policy of refusing to supply customers who are seriously overdue and who haven’t responded to your follow-up. Insist that the outstanding debt be settled first before you choose to supply more goods.

Putting a black and white policy in place will be best for your business in the long term.

6. Be prepared for large orders

If you commit significant resources to fulfilling a large order and payment is delayed, your business may be at substantial risk. Ensure you’ve carried out credit checks and received guarantees.

If possible, ask for a deposit or arrange for progress payments. This will improve cash flow and reduce your exposure.

7. Avoid the danger of a single customer

If your business is dependent on very few customers, make customer diversification a top priority. It’s much better to spread your risk over ten smaller ones than being reliant on just one large customer.

Next steps

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Cash flow management for small business: Payment terms to improve your process
2022-08-08
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This is general information only, so it doesn’t take into account your objectives, financial situation or needs. ANZ is not giving you advice or recommendations (including tax advice), and there may be other ways to manage finances, planning and decisions for your business.

Read the ANZ Financial Services Guide (PDF) and, if applicable, the product Terms and Conditions. Carefully consider what's right for you, and ask your lawyer, accountant or financial planner if you need help. 

Any tools, checklists or calculators produce results based on the limited information you provide so they are an estimate or guide only. As they are incomplete, they are not a substitute for professional advice.

Terms and conditions, fees and charges, and credit approval and eligibility criteria apply to ANZ products.

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