Cash Flow Issues
With most home-based businesses, you'll be doing the work or creating the product before you get paid for it. This is especially true for service businesses — whether you're writing newspaper articles or landscaping gardens, customers will be used to paying either on completion or on being sent an invoice. This can create cash flow issues: You may not receive the money for a month or longer, but the bills for your expenses will already be arriving.
At the risk of stating the obvious, successful businesses have more dollars coming in than going out, and they carry a cash reserve to cover those temporary times when the opposite might be true. You need to maintain a sufficient reserve — which may mean having enough savings or financing availability on a line of credit to cover yourself during the tough times. But the key is to manage the cash flow as effectively as possible to avoid needing the reserve, especially if it would involve going into debt.
Credit Management
When you invoice your customers, ensure that you include payment terms on the invoice. Is the bill due in ten days, for example, or thirty? What are the interest penalties for late payment? Are there discounts for early payment? All terms should be clarified before the work is done, but make sure you remind the client of the terms by stating terms on the invoice. Also ensure that you send out invoices promptly — you don't want to slow up payment by delaying the invoice at your end.
Even the best of customers can experience financial problems: Beware of regular customers who are taking longer and longer to pay their invoices. Give him a friendly call to establish what the problem is — but be wary about continuing to provide credit in case the customer's problems become your disaster.
Reduce your risk with new clients by fully informing them about your rates or the cost of the job at hand, preferably in writing, before you start. It can be useful to have them sign a work order, agreeing to the work and the estimate and acknowledging that it's only an estimate. Let new clients know as the job progresses if it's going to cost more than your estimate. If your business involves purchasing parts or inventory for a specific job, ask for a deposit to cover the cost.
Collecting Accounts Receivable
It's a sad fact, however, that some customers simply won't be able to — or won't want to — pay the bill. Although it doesn't make sense to spend hundreds of hours and thousands of dollars to collect a $250 outstanding invoice, you can take some reasonable steps to collect what's owed. Start with a few phone calls — be pleasant and polite and ask for a specific date that you can expect payment. If you don't receive it then, contact the customer again by sending a letter, again pleasant and polite, insisting that you get paid — and set a specific date for payment.
In some cases when customers won't pay the bill, it's because there's been a misunderstanding about the job or the invoice. Do your best to clarify the extent of the work and the payment terms ahead of time. When it's a large project, create a contract that outlines the obligations of both parties before starting to work on it.
If you still get nowhere, but you have some faith in your customer, you might offer to set up a payment plan — an amount paid weekly until the debt is fully extinguished. Regular payments are what you're looking for here — if the customer owes you $500 and can pay $25 a week, take it — as long as she continues to pay.
If you still have problems, you can turn the account over to a collection agency, which will take a percentage of what's collected. Depending on the nature of your business, you may also be able to place a lien on your customer's house (for your security system inside the house, for example) or vehicle (for your auto repairs) — this means that when the item is sold, part of the proceeds will go to you.
Or you can take the customer to small claims court, which is a court that you can use inexpensively, usually without the use of a lawyer, to make a small claim against another person or business (see Chapter 10). If you have the paperwork to back up your claim, you'll likely win — although that might not help you to actually collect if the customer simply has no money.
Dealing with the Big Guys
Larger companies sometimes take advantage of their size to delay paying their bills. If you're dealing with this, first make sure that your paperwork is in order. Send an invoice, whether or not they ask for one and ensure that you're sending it to the right person.
Second, ensure that your expectations are reasonable: Immediate payment is extremely unlikely; within approximately thirty days is probably the best you can hope for.
Third, do whatever you can to push the process along internally. Find out what their processes are and whether you can do anything to hasten them. If the check is overdue, follow up with the correct person in accounting, becoming a polite but persistent voice on the phone. Ask what you can do to improve the turnaround in the future. Sometimes, being a (polite) squeaky wheel can help; at other times, going up the hierarchy can help you get paid (especially if you're not worried about affecting your long-term relationship with the client). If it doesn't, and this is a perennial problem, assess whether this client is more trouble than it's worth — in particular, whether payment delays indicate a client who might be in financial trouble.
Inventory Overload
Managing inventory levels is a critical skill. Check with the trade organization covering your kind of retail business for the average “turn” rate — how often you can expect inventory to move in and out the door. If you have items for sale that are hanging around too long, then return them or put them on sale — move them off the shelves so that you can replace them with something else.
Watch and track sales: not everything will sell at the same rate, and some higher margin, high-priced items might take longer to turn and make a profit. But if you're stocking a particular item that's lingering on the shelves, it's time to exchange it for something new.
If you're trapped in an inventory deadlock — you can't sell the stuff you've got, can't return it, and don't have cash or credit to buy new inventory — then it's time to call your suppliers. They won't make more money from you until you reorder, so they have a vested interest in your inventory. Convince them to work with you — by sharing a markdown on the retail price so that you can put the item on sale or by allowing you to return items for credit on new inventory. Good distributors or vendors may listen if you're a good customer who pays your bills on time.
You can also try to unload the inventory you have to someone you know can use it. Call up the customers who bought some before, and offer them a deal on the rest. In the worst case scenario, when the goods aren't selling even if you cut the price, you might want to consider donating them to a charitable organization that can use them.
