One of the common problems of many small and home-based businesses is ensuring that they get paid for the products provided or services rendered.
I’ve seen this first hand with the lawnmowing/tree services company that we hired for our home. No, the problem is not with us :o) but in the way they try to win new business for their company.
Having worked on our property several times, our neighbor saw them and asked them to cut the branches of the trees in their property. The business owner, Vicente, immediately summoned his men to work next on our neighbor’s yard. Given that the lawn mowing/tree cutting business is highly dependent on word of mouth and referrals, Vicente was really hoping that he would be able to get new accounts in our neighborhood (we were their first clients in our area). So they willingly cut some of the tree branches, worked on the lawn and planted grass seeds — apparently, on the work-now-pay-later scheme.
Two weeks later, Vicente told us that he hasn’t been paid yet by our neighbor. Everytime he knocks on the door — even with the presence of several cars in the driveway indicating someone’s home — no one opens the door for him. He visited several times, and always the same thing — he can’t collect because he cannot get anyone to open the door for him.
So how do you avoid this problem?
In Vicente’s case, he needs to stop working on a new account pronto without any written contract and a downpayment. In our case, he worked on our property immediately when my husband first saw him driving in our neighborhood in his business truck — without pay! Same thing with what he did with our neighbor. He asked for payment from us only in his third visit (and we did pay him!). Lucky if all his customers are like us who will pay when asked to pay — but if he’s got more deadbeat customers, then it could spell real trouble to his small-scale operation.
As a small business owner, you need to realize that completing a job and collecting on the payment for a job or product can be two different things. Significant amounts of receivables can lead to cashflow problems, which can spell the end of a business in some cases. There’s also the hassle of going through the process of collecting (especially in Vicente’s case where he had to drive to the customers’ homes to collect). Other suggestions to ensure you get paid and improve cashflow include:
- Always have a standard payment form with you, especially if you are not expecting a sale. In Vicente’s case, when the neighbor talked to him wanting his services, he should have with him in his truck a payment form detailing the services he will provide and the amount the neighbor needs to pay. It is always better to have something in writing than just plain verbal agreement (some folks conveniently have amnesia when the collector comes!).
- Send an invoice on the same day. If you closed the sale today and the goods are already on their way, or even if you did part of the services required, do not let the day pass by without sending your client the invoice.
- Make your invoice clear and easy to understand. Make sure that your invoice does not contain any terms unclear to the customer. If the customer wants certain information on their invoice to make it easy for them to understand what is expected of them, accomodate their request.
- Offer a discount for paying ahead of time. If your standard payment terms is 50% down and 50% after the service has been done, offer to lower your price anywhere from 10-20% if the customer agrees to pay 100%. Or if they preorder your services for the next month or so.
- Make sure you cash checks immediately. It took Vicente more than a week to cash the check we gave him!