Good cash flow buoys the bottom line
You probably didn’t start your small business because you wanted the chance to master accounts receivable.
Yet as any business owner knows, keeping the doors open requires getting paid for the work done or product sold.
It’s more important than ever, given the state of the economy. So why are so many small-business owners behind on sending out invoices or collecting what they are owed?
“People starting a business don’t realize what they are really getting into,” said Mike Culver, principal of H.L. Mike Culver CPA in San Diego. “It’s not just doing the job you like to do. It’s also all the rest of the ancillary stuff like billing and collecting the money.”
The fact that too many small businesses are undercapitalized -- often from the start -- makes the situation worse, he said.
“That’s why the failure rate of small businesses is so high,” said Culver, who started his two-person firm in 1982. It took five years before his business started to make “decent money,” he said.
Lightfoot Planning Group in Carlsbad enjoys good cash flow because billing isn’t an afterthought, said Lou Lightfoot, who owns the 23-person land-use planning and landscape architecture business with his wife, Lynne.
The 30-year-old company’s projects include land-use master planning for the 2,000-acre Rancho del Oro community in Oceanside and the Franciscan order’s 200-year-old Mission San Luis Rey, also in Oceanside.
“We manage our accounts receivable and make sure our clients understand that we expect to be paid,” Lou Lightfoot said.
That may seem like a tall order for the many small-business owners who feel overwhelmed just trying to get the work or the product out the door. Most are far too small to have a dedicated accounts receivable person or other credit management professional on staff.
Though many rely on small-business accounting software such as QuickBooks or Peachtree, that doesn’t ensure that billing information is entered promptly, invoices are mailed regularly and overdue accounts are contacted quickly.
Outside bookkeepers can be a big help, but finding a qualified, reliable one is a challenge for some firms. Accountants can be too expensive for the smallest operations to use regularly for billing.
Despite the potential hurdles, as the owner of a small business it is your job to keep the cash flowing.
It’s not a complicated task for most small firms but it requires determination and follow through. The reward is having enough money to run and expand your business.
“If they don’t get their accounts receivable right from the get-go, then their business is not going to last very long,” said Larry Urdahl, executive vice president and chief operating officer of Spring Valley-based Complete Recovery Solutions, which buys and sells debt and handles collections for other companies.
Lightfoot and other experts share their tips:
Have a credit policy
When they open their doors, many small-business owners are grateful just to get a customer. The last thing they want to do is impose restrictions that might limit with whom they do business.
If you don’t have a policy, your company may not last. “When you get burned a few times, you almost have to,” Culver said.
Some industries have a common credit practice, which you can choose to follow or not. The key is to have one.
You may decide to do a formal credit check on each potential customer. If not, get three business references, said Dick Werby, a San Diego consultant who provides free counseling through the Service Corps of Retired Executives ( www.score.org/index.html).
The references should include contact information for companies they do business with on a regular basis. Get their account numbers at each business, then call to check their payment track record.
You can also request a bank account number, including a transit number, and call the bank to find out what their average balance is, he said.
The point is to find out whether they have the resources to pay you and whether they pay their other bills on time.
Collect a deposit
Lightfoot and Culver require a deposit before they start a job for most new clients. Culver, like many professional service providers, considers it a retainer and will provide work until the retainer is used up. He estimates the cost of the job and requires it of new customers who aren’t referred by someone he knows.
It weeds out those who might not pay, he said.
“I’ve had people say they’ll mail me a check, and I never hear from them again,” he said.
Early in his practice, Lightfoot started collecting a deposit equal to the cost of about one month of work, based on the client’s project. He holds the money, meanwhile billing regularly for the ongoing work, until the final bill, from which he deducts the deposit. He doesn’t pay interest.
He has had customers mail back their contracts without the deposit checks, but “if we feel strongly about it,” he said, “we’ll call them.” Some don’t want to pay the deposit. In that case, he said, “We talk to them and then make a business decision about whether we want to do business with them or not.”
On jobs of less than $10,000, Lightfoot said he sometimes asks for half of the estimated fee to be paid up front and the other on delivery of the work.
Put it in writing
After you decide on your credit policy, create a standard agreement that explains it clearly. You can include what you expect to provide clients, and what you expect from them in return. There are samples online at websites such as www.onecle.com.
That may seem like too strong a stance for some business owners, but when it comes to managing your money, you must be firm, Werby said.
“You have to get some kind of line on the people that walk into that front door because everybody appears nice. . . . You can’t be shy about this.”
Bill early, bill often
Culver and his assistant take three hours each month to do their billing, including cross-checking invoices to make sure they are correct.
“Billing is a pain but you’ve got to do it, so we make sure that’s the No. 1 thing,” he said.
Consider outsourcing it
You can hire an accountant or a bookkeeper to help set up your accounts receivable system, including your credit policy. If you have the funds, you can then use a bookkeeper for the monthly billing, although you need to keep an eye on the process and the information sent to customers.
Trying to juggle it all can cost small businesses more in the long run than any short-term savings that come from doing the work themselves. It doesn’t take too many unpaid or unmailed invoices to eat up a small firm’s profit.
Follow-up
“We have a fairly aggressive accounts receivable management,” said Lightfoot, whose wife oversees business operations. “So if a client does get behind 30 days, or 45 or 60 in today’s economy, we do . . . remind them.”
Werby, who owns multi-use real-estate projects in Oceanside, sends e-mail reminders to his residential and commercial clients before their rent is due. His leases spell out that they will pay a penalty for each day the rent is late. That could be $50 a day for a $3,000 rent payment, he said.
“You can’t be squeamish,” Werby said.
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