Cash Management for Small Businesses: Segment 3 Monitoring and Collection of Funds
Customers are always looking for discounts. Clients will say, ??I am a returning customer can you give me a break on rates you charge? or ??can you give me a discount if I buy more of your product.? Number one rule in business, keep the client happy, so hopefully you will get return business or a referral. So, when the customer asks for a discount, business owners more than likely will comply and offer some sort of purchase discount. Personally, I am not big on offering these type of discounts, because you don??t know if you are going to see any ROI from it. You hope that the customer will return or he will provide a referral. I think it is much more beneficial to offer a discount through payment terms.
Payment term deductions are when you provide a deduction in standard pricing to the client for meeting a certain payment date. This discount is intended to speed payment and thereby provide liquidity to the firm. By doing this you and your client both get some benefit and both are happy. The business owner will receive his/her payment more quickly and the client receives their discount. The business in turn should still receive client return business and referrals.
Additional customer issues that cause businesses to expend resources are excessive collections activities and custom orders. Most companies do not know the cost of processing a customer order or the costs of a single customer relationship.
Companies offer 2p10net30; meaning customer will receive a 2 percent discount for paying the invoice within 10 days. Regardless payment is still due within 30 days. The discount can be as little or less as you want, but if you are going to offer a purchase discount, you might as well get a guaranteed return from it. Any introductory finance book will demonstrate the math that 2/10 net 30 is equivalent to a 36 percent rate of return; hence even 1/10 net 30 translates into an 18 percent rate of return. While the individual amounts may seem small, they do add up. Losing a 2 percent discount on a $10,000 invoice may only result in $200 not earned, but multiply that by the number of invoices processed and the amounts start to add up.
Some would argue that most companies are operating on razor-thin margins and discounts can add up and can affect their bottom line. Regardless, most companies would offer a returning customer purchase discount, therefore there would be no guaranteed benefit for offering the discount. Another argument I have heard is that, many organizations have such cumbersome and inefficient processes that it is impossible to get the invoice turned around in the requisite 10 days. With software automation today this is also an ineffective argument.
For instance, the SAP Business One solution offers companies the ability to create alerts when certain actions or situations occur. Thus, a good software business solution will establish great procedures regarding when invoices were initially sent and how much time executives have to approve invoices for payment to take advantage of the discount. The client or customer??s goal should be to take advantage of all discounts for which they qualify. Many companies stretch the early payment term for a few days and will take the discount up until, for example, the 15th day. Regardless this policy will improve payment from your clients and will improve the amount of cash that you have on hand in your company bank account.
These steps to improving the monitoring and collection of a company??s receivables will lead to an increase in cash flow. The purchase of quality business management software will not only help with a company??s cash management, but have many other beneficial functions that will improve and automate company operating processes.
