Erik Gunn
Cash flow is the lifeblood of your wastewater business. A hefty balance of accounts receivable might feel like it’s money in the bank, but don’t kid yourself. As long as they’re unpaid, those receivables represent money in your customer’s bank, not yours.
To boost your cash flow, you need to stay on top of those receivables, says Melinda Toy, vice president and director of treasury management for PyraMax Bank, a full-service commercial bank in suburban Milwaukee.
Toy offers a series of tips on how to do that, starting from the moment your customers agree to hire you for the service they need.
1. Require a signed contract.
This doesn’t have to be complicated. But getting your customer’s signature on the proverbial dotted line makes it clear from the start that everyone knows the price and the expected outcome of your work and the terms and conditions of your transaction.
2. Require a deposit.
For a really short-term job, like busting out a clogged drain, this might not be realistic. But for a larger job, such as a major septic system repair, which will come with hefty labor costs and upfront materials purchases, a down payment offers financial protection.
3. Invoice early and often.
Unless you’re collecting immediately upon completion of the job, you can expect at least a day’s lag for payment in the best of circumstances. But you want to do everything in your power to make sure that lag is as short as possible.
“The best practice should be to invoice upon completion of a project, shipping a product or completing a service,” Toy says. If you want to get paid faster, don’t fall into the practice of waiting for one day each week to send out invoices.
As much as possible, ask for payment on receipt. If you feel that’s not possible or realistic, set a deadline of net 10 days (business days, not counting the weekends) for payment of a bill.
An alternative, especially for larger clients, is to offer a slightly longer payment window with a discount for early payment. For example, your invoice might set a net 30 days payment deadline for the full amount, but also offer a small discount for customers who pay in 10 or 20 days from the date of the invoice.
“Deadlines for payment of course also need to factor into your business model,” Toy points out. “If it’s not possible to get paid in 10 days, maybe there are some efficiencies you can put in place to at least shorten the cycle.”
4. Make it convenient for customers to pay you.
Convenience is a two-way street. You want to make it convenient for your customers to pay as quickly as possible. But you also want to make it convenient for your business to convert that payment into cash on hand.
Literally demanding cash is probably not going to fly, for all kinds of reasons. The associated recordkeeping headaches and the fact you can’t pay your own bills in cash are just two of them. Not to mention that you’ll almost certainly turn away far more customers with a policy like that than you would with multiple payment options.
It’s up to you if you want to refuse cash at all, but at the very least don’t require it.
Taking checks is the most common practice. That’s convenient for your customer and it should probably still be an option you offer. But how convenient is it for you, really? Remember, it still takes time to make the deposit.
“What about mobile deposit through my smartphone?” you might ask. That’s a great convenience. It also comes with limitations, as the financial advice website Bankrate points out. Those include monthly limits on how much you can deposit by mobile and hold times for mobile deposits, especially after hours.
Credit card payment options have become standard, and easy to take with Square and similar swiping devices that attach to (once again) your smartphone or its bigger cousin, the tablet. Of course, there’s also a fee that takes a bite out of your payment. Those usually combine a small flat-fee charge and a charge that is typically in the neighborhood of 2% of the bill.
Some merchants impose a transaction fee to offset those costs, but they can spark resistance among customers.
5. Explore new options.
Toy suggests another alternative to credit cards: automated clearing house payments. ACH is a form of electronic funds transfer, she explains, and it’s becoming increasingly popular with businesses, even small ones. Toy says some of PyraMax Bank’s customers even use it to pay their own bills, including handling payroll and paying vendors.
And businesses can establish ACH payment options for their customers using portal services.
“It’s a faster way to get funds into your account. It’s an alternative to a wire transfer,” she explains.
ACH transactions typically settle within 24 hours, and same-day transfers through those systems are within our capability now. The system is more popular in Europe — “They more often settle those debits and credits the same day,” says Toy — but catching on in the U.S.
ACH transactions have an advantage of much higher limits. Again, European countries, where limits are as high as $1 million a day, are ahead of the U.S., where they’re still at $25,000 a day.
SETTING UP
If you’re interested in pursuing this newest approach to making payment easier — and therefore improving your business cash flow — have a conversation with the financial advisor who counsels your business. Only that professional will have access to the details about your personal circumstances that will be important in making a sound judgment.
But assuming you get sound advice that it’s at least worth considering, Toy recommends these steps:
• Check with your financial institution’s commercial banking department. If there’s a treasury management office, such as Toy runs, that’s your first stop. Otherwise, inquire about direct deposit options.
• Be prepared to present detailed financial operations records — perhaps two to three years’ worth of tax returns — and to submit to a credit check. “ACH means some exposure to the bank,” Toy points out, and so to agree to an arrangement demands due diligence on your banker’s part.
• Be prepared for limits on ACH transactions, and make sure your typical revenue stream will fall within those limits.
Once you’ve gone through that mutual vetting process, you’ll set up a payment portal connected to your website. Make sure it’s easy for customers to get to and easy to navigate. Typically, Toy explains, the portal will give the customer the option of paying by credit card or to initiate an ACH transfer using information from their checking account.
There also will be some mechanism for securing customer permission before you’re able to automatically debit their account.
THE PAYOFF
There’s no question that moving to an ACH system for taking payments will require some due diligence to make sure it’s right for your business. But given the resulting ease and convenience it can provide for you and your customers alike, it should be worth your while to at least look into the concept.
Because in today’s digital financial world, it may be the closest you’ll get to realizing that famed money management maxim — “cash is king.”
