For a Sale to be Complete, the Money Needs to be in your Bank Account

It’s time to review the payment process in your business to ensure the money is in the bank.

Selling when you get payment at the time of sale is the best possible way to set up your business, and it doesn’t matter whether the sale is cash or on a credit or debit card. But for some businesses, particularly when you are selling to another business, it’s quite likely that you will be asked to provide an invoice and payment will be made at a later date.  

There are a few traps for the uninitiated in business with this scenario:

DON’T JUST PROVIDE AN INVOICE TO EVERYONE WHO ASKS FOR ONE.

Firstly, you should be asking them to complete a credit application where you can ask a series of questions about their business, get directors guarantees and ask for references.

Once you have this information, phone the references, do a Google search and see whether you can find out any information about them, good and bad, take into account your instincts if you’ve met the person or people involved and then set a credit limit.

This is the total amount that you’ll agree to have outstanding at any point in time. Once they have spent that limit, they have to make a payment before you provide any further product or services.

CONSIDER ASKING FOR UP-FRONT PAYMENT.

While you’re processing a credit application, there’s nothing wrong with asking for up-front payment for the first few transactions. This will give you a feel for how reliable they are, how committed they are to agreeing to your terms and so on.

SIGN AN ACKNOWLEDGEMENT.

Provide all potential new customers or clients with your terms of trade as part of the application process and have them sign an acknowledgement of having read them. The terms of trade will include your payment terms (e.g. 7 days, 14 days, 28 days).

The terms of trade will also include what will happen in the event invoices are not paid on time. For example, that you will put the invoices in the hands of debt collectors or take legal action without notice if invoices are unpaid and that the costs of those services will be added to their outstanding balance, also whether you will charge interest on the outstanding balance and at what rate.

FOLLOW UP IS ESSENTIAL.

Once you’ve started to issue invoices, the trick is to follow up and ensure that payments are made by the due dates. When payments are, make sure you use a variety of follow up processes, from sending statements and sending email reminders to phone calls.

During the course of this exchange, you can also advise that if payment isn’t made by a specific date that you will take legal action for recovery. Once you’ve done that, you must follow through and set the debt collector or lawyer onto the recovery process.

WHILST YOU DO HAVE A SALE WHEN YOU ISSUE INVOICES, AS LONG AS THE MONEY ISN’T IN YOUR BANK ACCOUNT, IT POTENTIALLY IS A SALE WITHOUT PAYMENT AND THUS NOT A SALE AT ALL, BUT RATHER A GIVEAWAY FOR FREE.

The longer the time after the issue of an invoice that it remains unpaid, the greater the risk that you’ve given away your products or services for free as the chances of receiving payment diminish. Following up regularly is key to keep your sale as a sale.

If you’ve got an opportunity to require payment up-front, use it. It will save on admin time, bookkeeping and improve your cash flow as you’ll have the funds in your bank account straight away.

IT’S NOT A SALE UNTIL THE MONEY IS YOUR BANK ACCOUNT.

I’ve recently been working with clients who sell products in the disability sector. They have had issues when the NDIS has approved the purchase of the product for a particular person.

After the client has ordered the product and it was ready for delivery,  the payment was due, and the NDIS has said that they didn’t agree for it to be purchased and they refuse to pay.

This is a classic example of how the sale is not a sale until the money is your bank account, in this case, no sale but they do still have the product. Unfortunately, as many of these disability items are specially assembled for the person, it’s not an easy on-sell to another customer.

And then there are other industries, like the construction industry, where invoices are routinely not paid, companies are forced to close down due to the mismanagement of cash flow by the builder or head contractor. The sale has happened in that the materials were supplied, the labour provided and the work is done, but when no money is received, the job was effectively done for free.

Even if your industry as a whole generally provides invoices and credit terms to their customers or clients, it doesn’t mean that you have to follow along. Consider whether you could require payment up-front for new clients or customers by providing them with a reason why. A sale is only a sale in my book when the money is in the bank.

Originally published on www.smallville.com.au