10 Startup Tips
Chapter 19: Hold on to Cash
Money is God
By now, your business is growing, well run,
It’s time to double-check your finances.
There is a pretty big difference between profit and cash flow.
There are quite a few sad examples of great businesses,
with great products,
and a large customer base,
but went bankrupt
because they didn’t have enough money in the bank
to turn their capital around.
As a startup,
you’ll hear a lot about this,
and it’s absolutely true:
Sales are fiction,
profits are sanity,
cash is reality.
Your money can be misappropriated
by customers when they don’t pay on time (or don’t pay),
too much inventory,
or too much on equipment and fixed costs.
In fact, the fastest-growing businesses are the ones most at risk from this problem
– the term is ‘business beyond capital’.
Good cash flow will help your business succeed
and one thing is for sure:
Poor cash flow will destroy a business faster than anything.
So how do you keep this from happening to you?
Ten golden rules of payment
You must learn to control your money like a hen protecting her chicks from hawks.
Unfortunately, there are a few dodgy businesses out there
and they can mess with upstarts.
what seems too good is something you need to be careful about.
You still haven’t sold anything
until the transfer customer is in the bank
(and the check is paid).
1. Make your financial statements public:
At each stage of the business process,
you should have a strong sense of how much money you have in your account
and what the next month will look like.
Don’t take this lightly.
Of course, you need to have proper bookkeeping,
but money should always be on your mind.
2. Hire a manager:
In your company,
you must have someone responsible for pursuing past due debts.
If not, make sure you set aside a fixed amount of time a month to do it yourself.
Consider hiring an accountant
or an outside agency to do this.
3. Don’t give your credit card right away:
When I made my first yearbook,
I was a penniless poor student
but was able to pick up the book at the printing house with cash in my pocket.
The strange thing is that no one asked me for money
and I didn’t say anything either.
They immediately gave me 30 days late payment.
I can not believe that.
They are really ignorant of the financial risk of a starving 20-year-old student
with only £800 at that age.
It is always in my mind not to extend a customer’s credit
unless it is absolutely necessary to do so.
Giving someone a credit card is like lending them money.
Just think how many new customers would be happy to do this.
In fact, think of friends and family members you can do it with!
4. Be cautious with new customers:
If a new customer asks for a credit card
and you feel insecure about them:
Ask about the trades they have and check back.
If they can’t provide a referral number
then you need to question the matter.
Ask them for a deposit or a partial advance.
This often helps you weed out potential customers.
Do not place large orders with suppliers on behalf of new customers.
At some point,
you’ll have to settle for the money they didn’t pay the supplier.
Let them order directly with the supplier.
You can talk about the discount they will get by contacting them directly.
In the long run,
you can do this for them.
5. Invoice in stages:
If you offer a service or product that takes time to complete,
invoice the job right from the start.
Payment terms will be 30% advance at start of work,
35% at completion of production and 35% after delivery.
This greatly improves your cash flow.
Negotiating payment terms is similar to negotiating prices.
A business owner supplies goods to a large supermarket.
After agreeing on this deal,
he began to close the negotiations
and they came up with a payment method.
Their basic terms are payment within 90 days.
If paying within 30 days,
they will reduce the fee for the customer.
Reducing fees for early payments is also a good idea.
7. Don’t wait: Old debts are hard to collect,
so don’t wait 90 days to chase a past due bill.
As soon as an invoice is past due,
create a credit control process:
8. Harness the power of clinginess:
Learn the skill of a toddler
– the kid who screams the loudest gets served first.
Many customers may also adopt a no-pay until prompted policy.
This was stated by Heseltine (former Minister of Education).
Minister of Industry and Trade) drawn
from his own experience in the early days of doing business:
We divide debtors into three levels:
(1) those who have received letters from attorneys;
(2) those who have received the bill of lading;
(3) those who have received a claim within 14 days.
My first piece of advice
when working with these debtors is to work with a third group first.
You need the following steps:
Make a call first.
Politely ask them how long it will take to pay you
(usually they’ll wait for a call before authorizing payment).
They also often delay with statements like:
“We have sent a payment request to the bank”
or “Our check payment schedule is next week”.
In that case:
Please accept the offer.
If they say 5 days later,
then after 5 days,
you keep calling to ask if they have paid.
And so on until they pay.
If still no progress, then:
Send them a “seven-day letter”.
An attorney or a debt settlement company should be able to do this for a small company.
They will send an indirect legal letter stating the bad consequences
if the debtor does not pay within 7 days.
This action makes them remember convincingly!
If they still don’t pay,
you can ask a lawyer or the court.
However, at this stage,
you need to consider whether they intend to pay.
Because you can spend a lot of time and money trying to preserve your honor.
Better treat it as a memorable experience
and tighten your credit policy.
Use unorthodox ways to get customers to pay
Some companies have turned debt collection into an art.
A large advertising agency in London sent a ragged,
smelly, and aggressive-looking cashier
to sit in a client’s luxury seating area
until he received a check of customer.
Or by my fancy you can join the Payment Chicken service
They collect debt by letting a chicken about 1.8m tall,
colorfully dressed to follow your debtor until they pay.
(‘This chicken does nothing
and always behaves very well under any circumstances).
9. Don’t rely on regulations:
You can make a rule that charges interest on late payments.
But will you one day be able to take your customers to court?
If they don’t intend to pay you,
this provision probably won’t help either.
10. Consider discounting invoices/selling receivables at a discounted price:
It involves depositing all invoices to someone (usually a bank) for them to pursue.
They’ll pay you an instant,
and then the balance
— minus their commission
— once the bill is paid.
And while you’re at it…
In the same boat:
This may sound strange,
but you are unlikely to be a great customer of your supplier
if your customers don’t pay you.
So, with the rules below,
set up a no-pay until you get paid policy.
A metal foundry business experienced a financial crisis.
The manager told the bookkeeper to write 63 checks to pay off the suppliers,
but to leave them in the safe
until they called for payment.
A few months later,
the manager was promoted
and he went back to ask the accountant about the checks.
There are still 57 in the safe.
These regulations are:
Always pay on time to the smallest individuals and suppliers.
Maybe, like you,
this is their only source of income.
If you don’t pay
– they won’t have anything to eat.
Always pay your primary supplier immediately.
You want to have a good relationship with them.
If you don’t pay them,
they won’t provide you with a good product or service.
If you have a decent amount of cash in the bank,
pay your bills immediately.