Article No :54 | October 4, 2006 | by Howard Mann
Everyone loves to talk about cash flow and your CFO will work hard to cast a positive light on the bottom line on your profit and loss statement. But before complex analyses of cash flow, amortization, counting your unpaid client invoices as an asset and ignoring the ones you have not paid yet comes a more fundamental philosophy that sets everything else in the right direction. Pay fast. Get paid faster.
Step 1: Pay fast
Every body loves to pat themselves on the back about how long they can string out paying bills/invoices but if that is how to need to operate your business then you already have some cracks in the foundation.
- You want to be valued by the businesses that consider you their client.
- No matter how good a relationship you may think you have with them nothing will break it faster than you being a lousy payer.
- Every day you don’t pay that bill you add stress to their life and their business.
- When you pay fast you become considerably more valuable to them as a client. Many good things come from that position
Step 2: Get paid even faster
To make step 1 really work for your business you need to get paid even faster than you get paid. I have grown into a bit of a fanatic on this topic with good reason. Nothing cramped my old freight business more than how long it took us to get paid by our clients. It caused us to consistently increase our borrowing from our banks and grabbed focus from and added pressure to every other aspect of our business. Here is the rule, please repeat it with me and to your customers/clients:
“We are not a bank”
Allow me to give an example with a little story…I once had lunch with a gentlemen who, at the time, was the CEO of one of the largest freight companies in the world. He had grown it to this position in roughly 5 years from a business that was similar in size to my own. Here is how he told me he set the foundation for his amazing growth.. He took a look at his list of money he was waiting to receive from his clients and how long it was taking to get paid. He set out, himself, to visit each and every customer and tell them “We are not a bank. If you want to continue to be our customer then you need to stop treating us like one. You certainly do not want to start paying us like one.” And he was willing to lose a client if they didn’t value the relationship enough to pay promptly.
The result in this fundamental shift was a huge surge in cash in the bank (See Brickyard Brick) that gave him the power and leverage to spend money on expansion, marketing, innovation and acquiring other companies that were strapped for cash.
Reset the foundation:
- Make it clear right at the start that you will run through walls for your clients but they must pay you timely.
- Send your bills out to clients right away (I am amazed at how many vendors I have to ask to send me an invoice)
- Be relentless about collecting the money that is due to you when it is due. The more you bend on this one the farther down into the hole you will slide. “They are an important customer so it is OK” will not cut it. Want to appreciate your clients more? Work with clients that keep their word and do not take advantage of you.
Pay fast. Get paid faster. “We are not a bank”
Add those principles to your business plan, projections, VC Presentations and key goals for the year. Most importantly, drive it into the core of your business. The results will be found in YOUR bank.