Maximize the amount of cash you get from a sale – right from the beginning.
Your sales contracts are the starting point to making your money. Every time you exchange a product or service for money you are signing a sales contract with your customer. This contact could be formally written, verbally agreed upon, or implied…but rest assured that it does exist and outline the terms of your exchange with your customer.
Every sales contract has three major facets to them: 1) the service side, 2) the legal side, and 3) the financial side.
The service side tells your customer what you are going to provide to them and what they are going to provide to you (e.g. money, cooperation, confidentiality)
The legal side outlines terms for conduct while engaging in this relationship, what happens if there is a dispute in the value exchanged during this relationship and how to ultimately terminate this relationship and part ways.
The financial side states the monetary value that will be exchanged as part of this engagement, and how this exchange will take place.
Now…As your CFO, we are focused on helping to lock down this third facet – the financial side of the agreement. The service side is certainly important but we leave those details to your internal operations team (which is probably you if you are a small business!). The legal side is of course best handled by your attorney. So that leaves us to take charge of the financial side.
This financial side is all about CASH FLOW, CASH FLOW, CASH FLOW. As the saying goes, “it takes money to make money.” You will need to spend money to produce the product / service that your customer is buying. If you sell a cake, you need to buy the ingredients and pay the baker to make the cake. If you sell consulting services, you need to pay a team of people to deliver the service.
The timing of cash then becomes super important to understand. Will you be getting cash from your customer before you spend money to produce their order? Or will you have to spend before you get any cash from them?
Your cash will flow is extremely important to understand so you can plan accordingly. I have seen companies literally go bankrupt because had too many sales that paid after the service is delivered – they depleted all their cash in producing services that didn’t pay until after the service was complete. If you know that your customer won’t pay until 90 days after the service is completed, then you can be prepared to outlay all the cash needed to complete the project and some buffer left to wait until the payment comes in.
Now…having a contract like this can be super stressful. But a lot of small businesses do this – in the rush to get a signed contract, they forget to think about how the sale will impact their cash flow. Well this is where your CFO comes in. As your CFO, I am always thinking about your cash flow. Cash inflow and outflow starts with the signed contract, and so I know that the greatest way to have a positive impact on your overall cash flow is to structure your sales contract the right way.
Here are some tips and tricks that I use to speed up the cash inflow:
- Require A Deposit or Full Payment. Require cash upfront before you even begin to service the sale. And make sure to earmark this in a deferred revenue account so you know how much you’re on the hook for in case the project terminated prematurely. (By the way, if you sell a product and have refund policy, this is essentially what you’re doing – asking your customer to pay upfront and giving them some time to terminate the sales contract they made with you.)
- Monthly Installment Payments. Nothing is more stressful than having to wait months to receive your next round of cash. You are spending money on regular intervals so make sure that you are receiving money on those same intervals to smooth out your cash flow. It will make it so much easier to see how your cash is flowing and plan accordingly.
- No Refunds On Installments. Sometimes projects end prematurely for whatever reason. This is particularity at risk on a longer term project – like an event. The last thing you want is for your customer to come back and say that the agreement was “all-or-nothing” and that you now owe back all the installment payments because the final deliverable wasn’t ultimately delivered. You’ve done a lot of work up until that point…and spent a lot of money,.,and you deserve to be compensated for your time and energy for what you’ve done to that point. So make sure there is a clause (written by your attorney!) which states that any installment payment is full earned at the time it’s due and is not refundable if the project terminated prematurely.
- Due Upon Receipt. Require your customers to agree that they will pay any invoice issued with terms “Due Upon Receipt” as it tends to get you paid faster. Imagine a bills payment clerk on the receiving end of your invoice, which a pile of bills on their desk, trying to figure out which one to pay first and which one can be deferred to later. Typically the clerk will select the bills that are most currently due and pay those first. So make sure that your bill is always at the top of the pile and gets paid first…and that your agreement states as such.
- Automatic Payments. The best way to ensure that your invoices convert into cash is to not even give your customer the option to pay later. In other words…Don’t carry receivables! Have your customer give you their bank or credit card information, and have them sign an agreement (written by your attorney!) that you will automatically charge their account every time a payment is due. You will then control the ability to receive payment. And if you’re feeling squeamish about this, you’d be surprised to learn that most people are perfectly fine with this, and even welcome it, as paying you is one less thing they have to think about.
- Agree to Factor. A Factor is someone that will “buy” your invoices from you. They give you the cash immediately (minus a fee) and assume the risk of collecting on the invoice. This can be advantageous in certain situations. For example, if you are involved in a long-term project that requires you to spend a lot of cash upfront before you get paid, a Factor can quickly become your best friend. If you feel that a Factor can be beneficial to you, make sure that you have a clause in your agreement (written by your attorney!) that allows you to transfer ownership of your invoices to your Factor.
- Winning Party Is Entitled To Legal Fees. Unfortunately there are sometimes disputes between the parties involved in a contract. Maybe the customer refuses to pay you (for whatever reason) and you are forced to have a court of law settle the dispute. Nothing can be more frustrating, time-consuming…and costly…than battling it out with a customer who refuses to pay you. Give yourself some extra protection and have a clause (written by your attorney!) that states that the winning party is entitled to recover their fair share of legal fees. It won’t save you time and frustration, but at least it can lessen the sting of paying money to get money that you are already owed.
Bottom line: Make sure that your sales contracts are reviewed by your service team, your attorney, and your CFO. Using these strategies will help ensure that you will maximize the cash flow from your contracts and build a financially stronger foundation for your business. And if you need some extra help, then schedule a free consultation with us and let’s chat.