For start-up business owners, one of the biggest and most common mistakes you can make is to place other business goals ahead of your company’s cash flow.

While it’s important to spend time on building your brand and generating sales leads, it’s downright vital to quickly cultivate a steady stream of what accountants call “free cash flow” — that is, the amount of cash coming into your company over and above all of your expenses.

After all, if you don’t have money, you won’t be around long enough to worry about those other things.

Cash flow is the lifeblood of your business. And when it stops moving, rigor mortis sets in. In fact, according to Jessie Hagen of US Bank, when businesses fail for financial reasons, poor cash flow is to blame 82% of the time.

Businesses need to make money to keep afloat, and monitoring your profit margins helps you know the health of your business and tells you if your company can grow.

Whether you’re a well-established business or a startup working out of a garage, you should understand your profit margins.

Making a big sale is exciting, especially for a new business. But getting paid late, spending time and money chasing overdue accounts, or worse yet, not getting paid at all, can destroy a business.

If you sell B2B, chances are your customers are going to demand payment terms. So before you start selling, it is essential to establish clearly defined credit policies that follow good credit management practices.

Being prepared to walk away from a sale is difficult, but if the payment terms a customer is demanding are not reasonable, if they are a chronically late payer, or if their credit does not warrant selling on terms, it may be necessary.

A better profit margin and getting paid on time are critical to your cash flow as an entrepreneur. That is why this article will focus on providing helpful tips on how to achieve a healthier cash flow, improving your profit margins and getting paid on time. Markdown Optimization

• What is Cash Flow
• Cash flow vs. revenue
• Why does cash flow matter?
• Cash accounting vs. accrual accounting
• Example of Cash Flow
• 10 Ways to Keep Cash Flowing Consistently Into Your Business
• What is a profit margin?
• How do you calculate profit margin?
• Why is profit margin important?
• What is a good profit margin?
• What are the different types of profit margin?
• How to Improve Profit Margin For Your Business
• How to make sure you get paid in full and on time

What is Cash Flow

Cash flow is a measurement of the amount of cash that comes into and out of your business in a particular period of time. When you have positive cash flow, you have more cash coming into your business than you have leaving it—so you can pay your bills, and cover other expenses.

Read Also: Using Customer Analytics To Impact Your Business Profit

When you have negative cash flow, you can’t afford to make those payments. The concept of having “enough money to meet your financial obligations” is also known as working capital.

Cash flow vs. revenue

Revenue measures how much money is coming into your business, while cash flow measures both how much is coming in and how much is going out. Cash flow takes also takes into account things like financing activities: did the bank just deposit a $10,000 loan into your account? It’s cash, so it counts!

Why does cash flow matter?

Cash is the lifeblood of your business. A wise person once said “revenue is vanity, profit is sanity, cash is reality.”

If you don’t actually have cash on hand, your business will stop working. Managing your cash flow is all about figuring out when you’re going to have cash in your hands, figuring out how to get more of it in your hands faster, and how to manage your spending so you don’t run into cash flow problems.

Learning to manage cash flow is a foundational building block for managing your business finances. If you’ve got that down, then you can start thinking about how to really grow your business, improve your margins and profit, and grow a healthy business.

Cash accounting vs. accrual accounting

If your business uses the cash accounting method, then your books will pretty closely match the cash reality of your business. But if you use the accrual accounting method, then measuring your cash flow is doubly important.

Reason being, accrual accounting is more of a long-term, big-picture way of understanding your finances. Let’s say you run a design agency and you just wrapped up two huge projects with a company. All the work in the contract is complete, and you just sent the invoices.

Under the accrual method, you’d put that revenue in your books as soon as you send the invoice, even if it takes the client six months to actually pay you. So your bookkeeping will not match the cash reality of your business. That’s why understanding cash flow matters.

Example of Cash Flow

Here’s an example of cash flow in action. Let’s say you’re a starving poet in post-WWI Paris. You just sold your first two poems to the New Yorker, and received a check for a whopping $30 in the mail.

Now, you’d like to go buy a new sweater because the garret you live in doesn’t have heating. That’s going to cost $12. Also, you want to buy everyone a celebratory round of absinthe down at your favorite watering hole, les Deux Magots. That’ll be $4. Finally, you owe Gertrude Stein $2.

That’s an $18 shopping bill. Your $30 should cover it easily, right?

Wrong. The bank doesn’t open until Monday, so you can’t cash your check. And until you have the money in your pocket, you can’t spend any of it. So you’ve got a cash flow problem—hefty revenue, but no liquidity.

Most small businesses aren’t run by starving poets, but many of them have trouble managing cash flow. That’s why cash flow statements are important.

10 Ways to Keep Cash Flowing Consistently Into Your Business

1. Know your expenses

Although discounting — through coupon sites like Groupon and BuyWithMe or even on your own — can help you attract new customers, selling anything at a loss won’t help you generate a positive cash flow. 

My view? Never discount. But if you do, know the costs and impact of what you’re offering and be prepared for the fallout. Among other things, you’ll need to know your overall cost basis — that is, what you paid for something.

You should also know your how much you should ideally charge, the cost of your offer and the profit margins on your product or service. How else will you know if your discount has you breaking even or operating at a loss?

2. Bundle products and services

Even though discounting isn’t always recommended, adding value is. By creating bundles of products or services, for instance, businesses can inject tremendous amounts of perceived — and tangible — value into their offerings for very little cost. 

A good example is the maintenance agreements some car manufacturers are now providing with the purchase of a new car. Not only does that type of offer help allay a major concern or frustration customers have — paying for a breakdown or time lost at the dealership — it also offers real value in terms of limiting out-of-pocket maintenance costs.

Put more simply, you can increase your price point initially since you’ve helped lower a perceived risk by offering something as basic as a guarantee.

3. Create a back-end product or service

If you know your initial offer to reel in new customers won’t be profitable, find ways to create higher price points on back-end products or services.

Perhaps the first hour of catering is free, but subsequent hours shoot up in price. Or maybe an attorney will agree to draft your will for less if she thinks you’re a likely candidate for estate-planning consultations in the future. 

4. Encourage repeat business

If you’re in a volume-driven business like retail, landing repeat shoppers is your holy grail for cash flow, profit and growth. In most cases, you won’t start to profit on a customer until the third, fourth or even fifth transaction. For this reason, you need to devote your efforts toward getting customers coming back — and more often. 

Consider loyalty programs, VIP offers and other frequent-shopper programs, which can be ideal vehicles for systematizing repeat business. Also keep in mind that the word “free” is a popular incentive among shoppers, and the costs of funding a freebie may easily be covered as long as you’re dealing with excess inventory or low-cost, but valuable add-ons.

5. Pre-sell products or services

For owners who want to encourage sales sooner, pre-sell your products or services. You might couch the pre-sale as a way for consumers to plan for their future or get a jump on shopping. You can also offer to take old, outdated products back at a pre-arranged price.

6. Sell or Retire Excess and Obsolete Equipment or Inventory

Idle, obsolete, and non-working equipment takes up space and ties up capital which might be used more productively. Equipment that has been owned for a longer period will usually have a book value equal to its salvage value or less, so a sale might result in a taxable gain.

This gain should be reported on your tax filings. If you have to sell below the book value, however, you will incur a tax loss, which can be used to offset other profits of the company.

Excess inventory can quickly become obsolete and worthless as customer requirements change and new materials are introduced. Consider selling any inventory which is unlikely to be used over the next 12 months unless the costs to retain it are minimal and the proceeds from a sale would be negligible.

7. Contract With a Collections Agency for Old Accounts Receivable

Pursuing old accounts receivable requires dedication and time, and can quickly reach the point of diminishing returns for your staff. Few small businesses have the resources, training, or experience to effectively pursue delinquent accounts.

Furthermore, customers who exceed 60 days for payment without a justifiable reason seldom warrant a continued relationship, and usually require firm measures to extract payment.

Third-party collection agencies are adept at working with such accounts, and generally are willing to pursue collection at their own expense in return for a set percentage of the collected proceeds.

In some cases, the agencies will simply purchase the delinquent debt from the business at a discount and assume all subsequent risks of collection. While the costs of third-party collection when compared to the original account balance are exorbitant, your alternative may be no payment at all.

8. Penalize Late Payers With Interest Penalties

A penalty for late payers is the “stick” in the “carrot and stick” approach to collections, the “carrot” being the discount for early payment. While collecting the interest may not be possible in all instances, the presence of the policy will emphasize the importance of on-time payments to your customers.

9. Offer Discounts for Quick Payment

Develop a discount program to encourage quick payments, collecting cash owed to you as fast as possible. Normal payment terms allow a 30-day period for remittance after the receipt of an invoice, with a 2% discount if paid within the first 10 days. You can offer more, less, or no discount for payment, depending upon your needs and your customers’ previous pay habits.

Remember, however, that your ability to institute a collections policy will depend upon your relative strength versus that of your customer. A major account might take an offered discount and still pay late.

10. Institute a Factoring Arrangement

Factoring typically involves a third-party, non-bank finance company, or “factor,” which advances a negotiated percentage, 75% to 80%, of the individual accounts in the accounts receivable balance.

As the accounts are collected by the company, the advance is paid off, plus a fee to the factor. In some cases, the factor may purchase the accounts at a discount and assume the responsibility and risks of collection.

Whether the company or its owners remain guarantors of the accounts is a matter of negotiation between the company and the factor. Factoring arrangement are typically more expensive (but less restrictive) than accounts receivable loans at regulated banks, so an arrangement should be pursued only after a standard accounts receivable loan arrangement has been rejected.

The origin of the expression “cash is king” is unknown, but its validity in the business world has never been contested. Apple, the company which created such iconic products as the iPhone and the iPad, is reputed to have $100 billion in cash on hand to take advantage of unexpected bargains or cover expenses when sales are less than expected.

Financial flexibility is important to every company, particularly when the future economic environment is unclear. Employing the recommended cash flow strategies above can build up your bank balances, extend the number of strategic options available to you as a company, and reduce the likelihood that you will be forced to take unpalatable or distressing actions.

What is a profit margin?

Profit margin is the measure of a business’s profitability. Profit margin is expressed as a percentage and it measures how much of every dollar in sale that a business keeps from its earnings.  Profit margin represents the company’s net income when it’s divided by the net sales or revenue. Net income or net profit is determined by subtracting the company’s expenses from its total revenue.

How do you calculate profit margin?

Let’s start with your gross profit margin. This is the simplest metric for determining profitability and one of the most widely used financial ratios.

Suppose your business makes $100 in revenue, and it costs $10 to make your product. If you make more than one thing, you can either average the costs of making each product or calculate a separate gross margin for each product.

The cost of making a product is known as the cost of goods sold, or COGS. It includes wages and raw materials, but not things such as overhead and taxes. In this example, revenue minus the cost of goods sold would be $100 – $10 = $90.

Once you determine your gross profit ($90), divide that number by your revenue ($100): $90/$100 = 0.9. To get the final percentage, just multiply that number by 100, which makes the profit margin 90% in this case.

Why is profit margin important?

Your profit margin shows how much money your business is making, the general health of your business and problems within your business.

“Profit margin is important because, simply put, it shows how much of every revenue dollar is flowing to the bottom line,” said Ken Wentworth of Wentworth Financial Partners. “It can quickly help determine pricing problems. Further, pricing errors can create cash flow challenges and, therefore, threaten the ongoing existence of your entity.”

Glenn Gutek, CEO of Awake Consulting and Coaching, agreed. “Your profit margin reveals the general health of the business,” he said. “Your profit margins tell you the return on investment (ROI) for all your expenses. When your margin is low, you are not getting the best ROI for the expenses of the business.” 

What is a good profit margin?

Knowing your industry is key. “For example, in the restaurant industry, margins are typically less than 10%,” Wentworth said. “However, in the consulting world, margins can be 80% of more – oftentimes, exceeding 100 to 300%.”

Business owners should create an annual budget for their company in order to set their own profit margins based on their own set of assumptions. Then, find out what your industry’s standard profit margins are. Then compare and contrast the two. 

That said, differences in margins were much more pronounced when we compared the data across multiple industries. Beverage manufacturers,  jewelry stores, and cosmetics had some of the highest profit margins, with 65.74%, 62.53%, and 58.14%, respectively.

Meanwhile, alcoholic beverages, sporting goods stores, and electronics had some of the lowest margins at with 35.64%, 41.46%, and 43.29% respectively.

What are the different types of profit margin?

Gross profit margin (mentioned above) is the simplest profit margin to calculate. To get a better feel for how much of your revenue you have left, use calculations for operating profit margin and net profit margin. The gross profit margin is your overall gross revenue minus the cost of goods. It may not reflect other major expenses.

Operating profit margin accounts for operating costs, administrative costs and sales expenses. It includes amortization rates and asset depreciation, but it does notinclude taxes, debts and other nonoperational or executive-level costs. It tells you how much of each dollar is left after all the operating costs to run the business are considered. Here is the formula for operating profit margin: operating profit margin = operating income/revenue x 100.

Net profit margin is the most difficult type of profit margin to track, but it gives you the most insight into your bottom line. It takes into account all expenses, as well as income from sources such as investments. Here is the simplified formula for net profit margin: net profit margin = net income/revenue x 100.

Your net income also can be defined as your gross revenue minus pretty much all of your costs, including COGS, operating expenses, interest, taxes and other expenses.

How to Improve Profit Margin For Your Business

Now that you have a better idea of the amount of profit that retailers are taking in, it’s time to look at the specific ways that you can increase your profit margins.

Here are 10 things you can try:

1. Avoid markdowns by improving inventory visibility

Markdowns are notorious profit-killers, so avoid them whenever possible. How do you do that? Start by improving how you manage your inventory. You should always have a handle on the merchandise you have on hand, as well as what your fast and slow-movers are.

This will help you make better decisions around purchasing, sales, and marketing, allowing you to sell more products and reduce the need for markdowns.

2. Elevate your brand and increase the perceived value of your merchandise

It’s interesting to see that cosmetics retailers have some of the best margins in retail. According to experts, one reason behind this is the fact beauty and cosmetics brands excel at creating personal and emotional connections with customers.

The product category creates a kind of personal connection with shoppers, unlike many other consumer goods. The price value equation is quite good, cosmetics make people feel better about themselves and foster strong customer loyalty, and the merchandising creates a sense of exploration — something the off-price retailers have also done quite well.

Depending on the brand, packaging, and marketing attached, the profit on each small item can be really high.

3. Streamline your operations and reduce operating expenses

Retailers often focus on pricing strategies when searching for ways to increase profits, but most should try to start with streamlining operations.

First, cut overtime and excess staffing as much as possible, then focus on areas of waste. Minimize supply: spend as little as possible, and ditch the fancy printed shopping bags, tissue fill, and excess packaging wherever possible.

If you’re not using an efficient point-of-sale to tie inventory, sales, and marketing under one system, consider making a switch to a low-cost system. This makes your entire store and staff run more efficiently.

Another great way to streamline your operations is to automate specific tasks in your business. By putting repetitive activities on autopilot, you can reduce the time, manpower, and operating expenses required to run your business.

Go through all the tasks that you and your employees complete day-to-day, and see if you can automate any of them. Are there cumbersome activities that are eating chunks of your time? Do you have to re-enter any data or perform certain steps more than once? Look for solutions that can take care of them for you.

Data entry isn’t the only thing you can automate. These days, there’s (usually) an app for most of the tedious administrative tasks in your store.

If you regularly make appointments with customers, for example, consider using an app such as Timely, which streamlines bookings and sales, and even sends automatic appointment reminders to your customers.

Do you spend a lot of time managing employee shifts? Check out Deputy, which lets you and your staff coordinate schedules from your mobile devices and sends shift changes and notifications for you.

4. Increase your average order value

Increasing the basket size or average order value (AOV) from shoppers already in your store is a great way to improve your profits. You’ve already invested in getting them to your location; now go and find ways to maximize their spend.

Start with upselling and cross-selling. As Matthew de Noronha, Head of SEO at Eastside Co., puts it, “someone who makes a purchase from you has already been qualified.

They have engaged with your brand and, while it may sound obvious, they are significantly more receptive to offers and product advertising. For that reason, it makes complete sense to encourage them to spend more.”

5. Implement savvier purchasing practices

Whether you’re at a trade show looking at new products or at the negotiating table with your suppliers, make sure you’re always finding ways to lower costs.

Think about the final cost

One of the best ways to do this, according to business coach Lindsay Anvik, is to “approach products by factoring in the final cost (i.e., wholesale cost, taxes, shipping, etc.). Once you have that final figure, ask yourself, ‘Would I pay X for this?’. If you wouldn’t, you need to find a way to lower the cost or move on from the product.”

Ask for vendor discounts or offers

Lindsay also recommends asking for discounts (e.g., free shipping) or other offers (e.g., throwing in a couple of extra products for free). This works particularly well when you’re buying in bulk.

6. Increase your prices

Raising your prices will enable you to make more money on each sale, thus widening your margins and improving your bottom line. Many retailers, however, balk at the prospect of increasing their prices out of fear that they’ll lose customers.

We wish we could give you hard and fast rules when it comes to pricing, but the fact is, this decision depends on each company’s products, margins, and customers. The best thing to do is to look into your own business, run the numbers, and figure out your pricing sweet spot.

On top of considering basic pricing components like your costs and margins, look at external factors such as competitor pricing, the state of the economy, and the price sensitivity of your customers.

And consider what types of customers you want to attract. Do you want to sell to shoppers would take their business elsewhere just because they could get an item for less, or would you rather attract customers who don’t base their purchase decisions solely on price?

You’d be surprised to find that majority of consumers (though this may vary from one industry to the next) may actually belong to the latter group. A study by Defaqto has found that “55% of consumers would pay more for a better customer experience.

Take all these things into consideration; do the math, and once you come up with a price increase, test it on a few select products then gauge customer reaction and sales from there. If the results are positive, roll out the increase across all your products.

Be creative with your price increases

You may also want to consider implementing creative or psychological tactics when coming up with your prices, to make them more appealing. You can, for instance, incorporate tiered pricing into your strategy.

Check out what shoe retailer Footzyfolds did. To combat cheaper knock-offs of its merchandise (they were selling them for $25, while Target had them for $10) the store decided to revamp its prices — but not in the way you might think.

7. Optimize vendor relationships

Earlier in this post, we talked about negotiating better contracts with your suppliers to reduce the costs of goods and widen your margins. If you want to take things a step further, consider building stronger relationships by working more closely with them.

Engage in Joint Business Planning

Daniel Duty, co-founder and CEO of Conlego, says that retailers should engage in Joint Business Planning with vendors. “This is a collaborative tool whereby profit goals are agreed to, and initiatives are developed to help reach those goals. In other words, both sides help each other become more profitable,” he shares.

Reduce supply chain costs and inefficiencies

“The supply chain — or the process of getting a product from the factory to the store floor — is always full of inefficiencies and huge costs,” adds Daniel.

It helps to have a discussion with your vendors to see if there’s anything you can do to make things easier or more cost-effective. 

Strengthen your relationships with vendors and determine how you can work better together. Doing so could help you identify ways to reduce product costs and operating expenses. Or, at the very least, it could improve your workflow and productivity.

8. Inspire your staff to do more

One way to boost your profits is to increase the output of your existing staff. No matter what type of store you’re running, there’s a good chance that your employees aren’t being as productive as they could be — and that’s not necessarily their fault.

According to the Harvard Business Review, companies lose over 20% of their productive capacity to organizational drag —  “the structures and processes that consume valuable time and prevent people from getting things done.”

As such, it’s important that you evaluate your store processes to ensure that they’re not slowing people down. The key is to come up with procedures that can easily be replicated and implemented by your staff even when you’re not around. (Hint: if you have the right technology as mentioned above, you’re off to a great start!)

Once you’ve tightened up your processes, you can work on empowering and training your team to level up their game. There’s no one right way to do this, as each retailer is different. But here are a few ideas:

• Set the right sales targets and motivate your team to meet (and beat) those goals.
• Identify the key traits of successful retail associates and develop those characteristics in your staff.
• Implement retail hiring and training best practices to boost performance, sales, and customer service.
• Help your team overcome their fear of selling.
• Educate your staff on suggestive selling.
• Train your staff to upsell and cross-sell.
• Train your staff to make a better first impression with customers.

9. If you must discount your products, be smart about it

While discounting typically goes against traditional advice on profitability, it could work to your advantage if you do it right.

Consider personalized offers

For instance, you could try to provide tailored offers. Remember that not all customers are wired the same way. Some people may need a 20% off incentive to convert, while others don’t really require a lot of convincing.

Instead of killing your profits with large, one-size-fits-all offers, identify how big of a discount is necessary to convert each customer.

Case in point: Online bicycle retailer BikeBerry.com. The e-tailer sought the help of big data company Retention Science to analyze customer behavior and gather intel on their customers’ past purchases, browsing history, and more. This allowed them to get to know their customers and figure out the most cost-effective way to convert each one.

They then created a series of email campaigns with five different discount offers tailored to each individual. Customers received one of the following offers in their inbox: Free Shipping (which is huge because shipping costs can run high for bikes and other accessories), 5% off, 10% off, 15% off, and $30 off new products.

The campaigns ran for two months and within that period, BikeBerry not only increased sales, but they were able to widen their profit margins by not offering discounts that are too big to customers who would convert at a lower threshold.

See if you can do something similar in your business. Instead of offering blanket discounts, go through the purchase histories of your customers, then personalize your offers based on their behavior and preferences.

Doing so won’t just increase the chances of conversion (people are more likely to respond to an offer if it’s relevant to them), it’ll also help you maximize your margins.

10. Identify and eliminate waste

Finding areas of waste in your business — and eliminating those wastes — can save money and add to your bottom line.

Put it simply, the 8 types of wastes can be summarized using the acronym “D-O-W-N-T-I-M-E”:

D – Defects (defective products due to issues like quality control, poor handling, etc.)

O – Overproduction (ordering or making more merchandise than necessary)

W – Waiting (unplanned downtime, absences, unbalanced workloads, etc.)

N – Not utilizing talent (not fully leveraging the skills or potential of your team, having employees do the wrong tasks, etc.)

T – Transportation (unnecessary movements of products — e.g., unnecessary shipping, inefficient movement from one store to the next)

I – Inventory excess (surplus or dead stock sitting in your backroom)

M – Motion waste (unnecessary movements of people — e.g., inefficient store layout)

E – Excess processing (having to process, return, or repair products that don’t meet the customer’s needs)

Go through each of these components individually and see how they apply to your business. If these types of wastes are present, find ways to reduce or eliminate them.

Late payments affect your cash flow

Forty-six percent of all B2B sales are extended on credit, meaning that invoices aren’t due on receipt, and according to The Atradius Group, a worldwide provider of trade credit insurance, surety, and collections services, 48.8 percent of all of those invoices are being paid late.

But more concerning still is that when an invoice went 90 days past due, there was only about a 50/50 chance of it being paid in full. It’s a problem for businesses concerned with cash flow.

Read Also: Actionable Tips to Manage Projects And Offer Client Support

So what are those businesses doing wrong? Atradius found that 81.5 percent of companies surveyed did not have credit management policies in place and only 50 percent did credit checks on their customers before selling on terms!         

How to make sure you get paid in full and on time

As a new, small business owner, growing sales is often the top priority and it can be difficult and time-consuming to determine who gets credit, how much, and for how long.  

To increase your chances of getting paid on time and in full, you must establish and follow good credit management practices from the get-go.

Here are 13 good credit management practices to increase the odds that you’ll get paid in full and on time.

1. Create policies

Establish clearly defined credit and collections policies upfront, before offering credit terms to any customers.

This should include determining how much credit you can afford to give without impacting your cash flow, deciding which customers will qualify for credit and how much, establishing your payment terms, and clarifying your collections process for overdue accounts.

2. Require a credit application

Have all customers complete a credit application before agreeing to provide credit. There are lots of templates for B2B credit applications available online if you’re not sure where to start.

Research and get to know your customers by using credit bureaus and asking for trade and bank references. Check those references!

3. Track and review payment patterns for existing customers on a monthly basis

This will help you identify any changes that might signal a potential problem.

For example, if a customer who always paid on time begins to pay later and later, it may signal financial distress, and you will want to reevaluate their terms and credit limits before things get out of hand.

4. Communicate your policies to customers

Clearly lay out all payment terms and conditions in writing on all contracts and invoices, including late payment penalties, and make sure you actually implement your late payment charges.

5. Ask for deposits

Make sure to require a deposit for large orders, custom orders, and for new customers with limited or questionable credit history.

6. Invoice promptly

Invoice right away, and call your customer after sending the invoice to confirm receipt and highlight payment terms and due date. Follow up immediately by telephone on overdue accounts.

7. Accept multiple payment options

This includes checks, EFT, ACH, e-transfers, and credit cards. Make it easy for your customers to pay you!

8. Offer early payment discounts

Offer discounts to clients who pay early to incentivize prompt payment, such as a 2 percent discount when an invoice is paid within 10 days.

9. Refuse new orders from overdue accounts 

Do not accept orders from clients who are not paid up, and implement COD policies for chronically late payers.

10. Do not pay sales commissions or bonuses until payment is received

A sale is not a sale until the cash is received. Incentivize everyone in the company to make collections a priority.

11. Purchase credit insurance

For large accounts and/or international customers, make sure you have insurance. 

12. Focus on having a diverse customer base

Having a large and varied customer base means that a payment problem with one customer does not put the entire company at risk.

13. Use accounts receivable factoring

Accounts receivable factoring will help convert outstanding invoices into immediate cash.

Factoring is an option you can use when you can’t afford to wait for your customers to pay their outstanding invoices. A factoring company will buy your outstanding invoices at a slight discount. You get immediate cash and the factoring company takes over the waiting period.  

As a new small business owner, growing top line sales is exciting, while managing credit can be difficult, boring, and time-consuming.

It is very hard to turn down a sale, but not following good credit management practices at the front-end can be disastrous at the back end when you have to spend time and money chasing unpaid invoices.

Conclusion

To increase your chances of getting paid on time and in full, you must establish and follow good credit management practices from the get-go. Remember, a sale isn’t a sale until you get paid!

Your profit margin is a metric that should always be on your radar, and for good reason: it answers critical questions about your business, like whether or not you’re making money or if you’re pricing your products correctly.

It’s important to note, though, that your profit margin isn’t just something you should measure; it’s a metric that you should continuously improve. As author Doug Hall said, “If your profit margins aren’t rising, chances are your company isn’t thriving.”

The three aspects of Business just discussed (Cash flow, better profit margin and getting paid on time) are worth looking into.