The Not-So-Happy Holidays: Many SMBs Struggle with Year-End Sales and Cash-Flow

Business.com / Finances / Last Modified: December 6, 2017
Photo credit: fizkes/Shutterstock

Concentrated year-end revenue can lead to cash flow problems for small businesses. With this in mind, here are some tips on how to ensure you get paid faster.

The five weeks between Thanksgiving and New Years are critical for small and medium-size businesses, with sales during this period representing 20 percent of total annual revenue according to a new survey by WePay. This period is even more critical for businesses that sell goods versus services, with holiday sales representing 28 percent of their annual revenue. It's not just retailers that see a spike in sales. Related services, such as trucking, marketing, packaging, logistics, shipping, temporary staffing, and warehousing, also see significant spikes in sales in the final few weeks of the year.

But highly concentrated year-end revenue can be a double-edged sword, with many small businesses (SMBs) reporting the financial boost from increased sales is often accompanied by significant customer payment and cash flow challenges. In the same WePay survey, 70 percent of entrepreneurs reported experiencing at least one critical business issue between Thanksgiving and December 31, 2016. Dealing with late-paying customers was the most-often cited problem, with 21 percent of respondents reporting that they struggled with late payments and high accounts receivable (AR) at the end of the year. 

But managing cash flow when dealing with late payments is a challenge year-round, with 66 percent of SMBs stating that at least 10 percent of their customers do not pay in accordance with their payment terms. Dealing with late payments not only costs most SMBs money but also results in lost productivity. Fifty-nine percent of businesses from the WePay survey reported having to follow up with customers on late payments at least two times on average before getting paid.

To start 2018 with a healthy cash flow, there are a number of best practices SMBs should follow year-round to ensure they get paid faster.  

  1. Submit invoices electronically and immediately upon delivery of goods or service.

  2. Clearly state payment terms on all contracts and invoices.

  3. State the actual payment due date on invoices, in addition to payment terms.

  4. Make a follow-up call after invoicing to confirm the invoice was received and is accurate. Also, highlight payment terms and the payment due date.

  5. Accept multiple payment options, including wires, checks, ACH, etransfers and credit cards. Make it easy for your customers to pay you.

  6. Offer customers discounts for early payment; for example, offer a 2 discount if the invoice is paid within 10 days. Strictly enforce early payment discounts. Charge back any discounts taken that are not paid by the early payment deadline.

  7. Reduce payment terms. If you currently offer 60-day terms, reduce it to 30 days. If you offer 30-day terms, reduce it to 15 days.

  8. Where possible, get a deposit before commencing work, especially for new customers.

  9. Be prepared to walk away from business if a customer's payment terms are not sustainable for your business. 

  10. Have clearly defined credit policies, including conducting credit checks on customers before extending credit. In addition, implement late payment fees, refuse new orders from late-paying customers until their account is up to date and implement a cash-on-delivery policy for chronic late-payers. Don't be afraid to modify payment terms if a customer's payments slow down or if there are other changes in the business relationship.

  11. Track average days sales outstanding (DSO). Make it a companywide practice to reduce it by 20 percent in 2018.

  12. Despite your best efforts at developing and implementing a payment process, you may find that you are still at the mercy of your customers in determining payment terms. It is standard practice for most large and multinational corporations and government organizations to have 60, 90 and even 120-day payment terms. When this is the case, make sure you factor in the cost of carrying their AR for an extended period of time into your pricing. It is not your role to provide free financing to your customers.

  13. Secure additional sources of working capital financing beforehand to manage through cash flow challenges caused by seasonal spikes in sales and late-paying customers. Options include margined lines of credit through traditional banks, accounts receivable factoring, purchase order financing and asset-based loans. Be prepared so that you are not crushed by growth, seasonality, and late-paying customers.   

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