Following up on the article
>>> How To Increase Cash Receipts In A Cash Flow Forecast
We will look at the issue of getting payments in advance of doing the work from your customers.
How To Get Payments In Advance From Customers
One of the fastest way to increase cash receipts in your cash flow forecast is to ask for receipts in advance (although you would ask customers to pay in advance from their perspective).
This is custom and practice in some industries e.g. plant and machinery designers. It’s also done if the customer has a poor credit history or has just started the business and needs to earn an allowance for credit.
It’s easiest to apply when the business doesn’t regularly buy the product or service and easiest to justify when the supplier has to make a cost commitment that is likely to be lost if the customer backed out of the deal.
Any kind of custom design, manufacturing or service work requires trust when the supplier can’t repackage the product or service and sell it to another customer.
Remember you might want / need stage payments along the way if the project is very time consuming e.g. 20% on order, 20% after two months, 20% after four months, 30% on delivery and the final 10% say 60 days after delivery.
Receipts in advance is even used in professional services so don’t think asking says bad things about the need your business has for cash.
Some business coaches will be asked to be paid upfront each month or quarter, lawyers will ask for a retainer that is topped up regularly and accountants often ask for monthly payments of their accounts fees even though most of their work is done after the end of the financial year.
The downside of asking for a receipt in advance of the work is that it puts the customer at risk, out of pocket when no value has been delivered and, if cash is short, may create a big preference for a supplier who will grant credit.
How To Ask For Payments In Advance
- Explain that it is custom and practice in the industry like the lawyer (if it is).
- Explain that you will have to make financial commitments of your own (which may also involve payments in advance) that are unique to this order.
- Explain that it helps the customer to spread out payments rather than have a big bill at a difficult time (this is what accountants do, somehow they make it seem as if paying them upfront is good for you and because you trust them to look after your financial interests, you oblige.)
- If necessary explain that you can’t afford to do the job without financial support. As a seller, I’ve found it useful to remind people that I have a very small business and normal commercial arrangements aren’t appropriate. Of course you need to emphasise the personal service and other benefits of buying from you at the same time. As a buyer, it has seemed reasonable to me that if I’m having a kitchen or bathroom renovated, I pay for supplies upfront rather than the fitter.
- Be prepared to say No. You require advance payments or you won’t do the work. Always remember that a deal has to be good for both of you.
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