Keeping track of how much money is coming in and going out of your business is essential. It’s so critical that failing to do this could have dire consequences for your business. In fact, the number one reason that small businesses fail is due to cash flow issues. So, how can your business avoid getting tied down by cash flow problems? Here are a few tips:
Review Clients Before Signing Them
It might seem counterproductive to screen potential customers, but doing so could save your business from having to deal with some sticky financial issues. When you think about it, it doesn’t seem wise to hand over hundreds or thousands of dollars worth of products or services without some assurances you’ll get paid.
You can minimize your risk by doing some onboarding for new clients before you give them the keys to your kingdom. Banks do something similar by checking for potential red flags when they open a new account.
Check Your Client’s References
Ask your new client to fill out a credit application and include a section requiring several references. Instead of simply trusting that these are valid, take a few moments to give the references a call to check for creditworthiness. Some people assume you won’t call and might even give fake names and numbers.
Run a Background Check
Consider running a background check on new clients. If a business is legitimate, you won’t find much and can move forward with your new relationship. But catching just one serial scammer can ensure that those background checks pay for themselves several times over.
Check Their Credit
You can also run a credit check on your new client. Depending on the nature of your business, you might want to run a personal credit check, a business one, or both. Doing this can tell you if the person or business has a history of not paying their debts or, even better, paying everything off on time. You can also see how many outstanding debts they have as an indication that they may soon be overextended.
Create a Written Credit Policy
Beyond checking out your clients before you extend credit, your business should also create a written and ironclad credit policy. Your policy should be attached to every invoice, and you should have a signed copy with all new client contracts.
A basic credit policy should include:
- Terms – This refers to when the balance is due, such as “net 30.”
- Late Fees – How much will you charge for late fees? Will it be a flat amount or a percentage of the balance due (most opt for a percentage)?
- Legal Fees – If you must pursue legal action, spell out who will be responsible for paying legal fees.
Every industry is a bit different, but it’s simply good practice to have some policies and procedures in place to avoid falling victim to cash flow problems.
Nolan Accounting Center helps small businesses throughout Southeast Wisconsin avoid and recover from cash flow problems. Our accountants and CPAs provide accounting, bookkeeping, tax preparation, and payroll services to businesses in the Milwaukee, Muskego, New Berlin, Greenfield, Waukesha, and West Allis areas. Contact us now to learn more about our services.