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We all worry about our financial obligations in our personal lives, so when someone moves into the intimidating and pressure-laden world of business, debt can become their obsession. It’s a frightening word, and it intuitively feels like the primary foe: if you can ensure that all your debts are paid in full in a timely fashion, you can achieve profitability. Right?
Well, it isn’t quite that simple, because it’s only half of a broader matter: cash flow. While it’s certainly important to pay your debts promptly, it’s just as important to get your invoices paid. Not convinced? Allow me to explain what cash flow means, and why invoicing is crucial:
Cash flow as a key growth metric
During any given business period — you’d typically use a month, or perhaps a week — you’ll have certain financial commitments (your debts) as well as various financial expectations (your income). Cash flow is the two placed in direct opposition to see where liquidity is being lost or gained (negative vs positive cash flow).
Cash flow is a vital growth metric because profitability — while essential — isn’t always enough to keep a company expanding, or even maintaining its position. If you make investments that will be profitable in the long term, but have outgoings draining your funds in the short term, your resources can flatline: this can, in principle, lead to the complete failure of your business.
The potential effects of delayed payments
Let’s say that you attempt to secure positive cash flow by matching the turnaround times of your outgoing and incoming transactions, or even turning them to your favor. You reach agreements with your clients to get paid swiftly for products provided and services rendered, and feel confident that you’re in a solid position — but it doesn’t quite pan out.
Despite those agreements, one or more of your clients delays payment. The excuses can vary: perhaps there were internal communications issues, or financial services weren’t running, or there was a degree of dissatisfaction with your work. You can chase them (Fluidly has some solid reminder templates), but even if you’re willing to pursue legal action, you can’t hurry things along — justice works slowly.
So what are the dangers of being paid late? Well, it most obviously hits your cash flow, which can cause disaster. That’s not all, though: consider the potential impact to employee morale. Not only can workers start to worry, affecting their work, but they can also see their salary payments missed — modern businesses rarely think about this, using payroll automation (through a tool like Wave) to ensure that payments go out when required, but a lack of liquidity can lead to payment failure. Will staff members keep working when they’re not getting paid?
How you can deal with awkward clients
If you find that clients are being sluggish in paying what they owe, you need to take action to change how you pursue payments, and overhauling your invoicing is a core part of that. A great invoice is clear, sets out exactly what’s required, and makes it as easy as possible for the client to pay. It’s also trackable, allowing you to see when it’s been accessed (and been paid).
Another way to get your invoices paid faster is to build better relationships with your clients. It is possible to get too close, leading you to let them get away with late payment, so you need to maintain boundaries — but if you’re on first-name terms with clients, it makes it somewhat easier to reach out to them and politely ask that they make payment. Sometimes invoices don’t get paid because people get busy and distracted, and a reminder is all that’s needed.
Remember the importance of setting out your expectations early on, and making it clear that payment deadlines must be met. Before you take on clients, explain to them what you’ll do if you don’t get paid on time, and give them a formal copy of your procedure. That way, if it comes to that, they won’t have any grounds to complain.
Cash flow is a mission-critical calculation for every business, and just as you need to minimize the money you have going out, you also need to maximize the money you have coming in. Don’t let clients get away with indefinitely delaying payment.