(Illustration by Nicholas Little)
Jory Lamb was elated when he landed a huge government contract shortly after starting his Calgary-based tech business in 1996. He was so excited about the work that he didn’t account for the time it would take to get paid. “The good news about working for the government is that the cheque will always cash,” he says. “The downside is that the cheque isn’t always timely.”
It was an oversight that almost cost him his business. He maxed out his $10,000 operating line to cover expenses while he waited; money from smaller clients quickly vanished. When he found himself $5,000 short of making payroll, Lamb went to the bank, hopeful that he’d get some emergency help. He was wrong. “I was left scrambling,” he recalls. “I cashed in my RRSPs and moved my worldly wealth over to make payroll.”
That wake-up call drove Lamb to develop processes to keep his company, which has evolved into a business management software provider called VistaVu Solutions, from ever experiencing that kind of cash-flow limbo again. He knows he’s lucky to have survived; many companies fail not because their business models are flawed but because they just can’t get money they’re owed in time. It doesn’t have to be so; in fact, even the smallest and newest of companies can make changes that prompt quick payments—and none of them involve hiring a guy with a lead pipe. Simply apply these proven practices and watch the cash flow in:
1. Bill early
When you’re running a growing business, invoicing is rarely a priority. But it should be, says Michelle Dunn, a New Hampshire-based, professional debt collector and author of The Guide to Getting Paid. “Don’t wait until the 15th or 30th of the month to bill your customers,” she advises. “If you’re able to bill immediately, your term starts as soon as they receive the invoice.”
2. Bill often
In the eight years since Brent McPhail started his Windsor, Ont., business—Brave Control Solutions Inc.—he’s faced the “exact same” cash-flow problem. The company engineers industrial automated systems, and the long-term nature of its projects can create serious payment delays. To avoid this when possible, McPhail started breaking his work into multiple deliverables, agreed to by the client. It’s a win-win solution: Brave is often able to get paid in increments, and the client avoids a massive bill at the end.
This approach also makes clients more invested—both literally and figuratively—in the outcome, says Mark MacLeod, founder of Toronto’s SurePath Capital Partners and former CFO of FreshBooks and Shopify. “This creates alignment because your client has skin in the game,” he says.
3. Go electronic
Paper invoices require delivery, data entry and processing—all steps that delay payment. That’s hard to justify when there are plentiful, and affordable, electronic billing options available. Indeed, companies that use electronic billing software have on average 13.3% fewer DSO (that’s “days sales outstanding,” accountant-speak for a firm’s typical collection period), according to an SAP benchmarking survey. At VistaVu, all billing and payment is electronic, which Lamb credits with reducing its DSO, adding that each time the period goes down by a day, it translates into $2 million in free cash flow for the year.
4. Offer incentives
Janet Stimpson, president of women’s clothing wholesaler White House Design Company Inc. in Burnaby, B.C., runs a business whose competitive advantage hinges on fulfilling orders quickly. So she offers clients a 5% discount for early orders, which means earlier payments. “It’s better for us, and it’s better for them,” she explains.
Another option: offering a discount to customers who pay quickly. This can be as small as 1% off for clients who pay within 10 days; in Dunn’s experience, even a tiny markdown will open the wallets of customers, especially those with higher bills.
5. Pick up the phone
Sometimes clients don’t pay because they simply can’t. But Jeffrey Sherman, CFO of Toronto-based Atrium Mortgage Investment Corp. and author of Cash Management Toolkit for Small & Medium Businesses, says clients often “choose not to” pay because they are dissatisfied. And that falls far beyond the scope of the folks in accounts receivable.
Lamb follows up each invoice with a phone call to make sure VistaVu customers don’t have any questions. It’s a simple practice that lets him address any issues upfront—long before payments lag—and shows clients that he’s serious about getting paid. It might seem like busywork for a CEO, but Lamb considers it a valuable use of his time. As he puts it: “It’s not what you make that counts. It’s what you keep.”
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