How to Obtain Payment Earlier for Small Business


Keeping sales ledger debtors to a minimum is vitally important to the expansion, and sometimes even the survival, of small firms. Streamlining the method of raising invoices will, by itself, often lead to a significant increase in cash flow by getting the invoices on to the customer’s sales ledger earlier. It is also help­ful to take a close look at how companies, especially the larger ones, organise their monthly payments to suppliers.

The problem for the small company is how to obtain pay­ment earlier, and it should be tackled in the most direct way by asking the customer’s accounts staff how it can be achieved. This discussion gives a useful understanding of how their internal systems work, and the importance of computers soon becomes obvious from references to ‘next week’s computer run’ or ‘the month end cheque print-out’. The detailed working of every computer system is unique, as sellers of packaged programs soon discover, but certain common methods stand out.

Obtain Payment Earlier

One technique is for the computer to print out a cheque and remittance advice on a certain date or in a certain ‘pay week’ or ‘pay month’. This is entered manually or, alternatively, can be calculated by the computer. Among the factors taken into account when deciding the pay week are the invoice date or company’s own month end date, available discounts, terms stated on the purchase order and, most important of all, the number of weeks’ credit the company takes as a matter of policy. The credit taken from different suppliers may vary because of pay week decisions made by the purchasing or accounts depart­ment. It should be noted, therefore, that invoices can be ‘brought forward’ for earlier payment by the customer’s staff 1 In this case the original week number is changed by inputting one which causes the cheque to be produced earlier.

If a pay week type of system is not used, cheques and/or remittance advices will be prepared in advance, often at a corn-outer bureau. The flexibility of the pay week system is then obtained in a variety of ways. Cheques may be held for some rime before posting and if the dates on cheques are recorded in the sales cash book some interesting patterns can be revealed. On the other hand, cheques may be made out without a date, this being stamped on at the time of despatch. At the extreme, of course, some companies will only post off cheques as final demands and cut-off notices are received.

Larger companies will not normally hold individual cheques in this way or apply onerous terms to particular classes of supplier. The inconvenience is too great and cheques will be released in bulk in some systematic manner. The Ford Motor Company, for example, pays on a four-weekly cycle based on the initial letter of the supplier company name. As long as the information required by Ford is on the invoice this procedure is said to result in payment within normal monthly terms.

Many companies, mainly small to medium ones, will not raise a cheque until a statement has been received and recon­ciled with their purchase ledger. The statement should, there­fore, be sent off within 10 days or so of the month end and show all invoices despatched. Even if these are not all due, a sizeable sum owing on the bottom line can concentrate the cus­tomer’s mind on paying those that are due. The reconciliation of statements is time-consuming work, however, and many larger companies ignore them altogether, but this cannot be relied upon unless the supplier is specifically asked not to send them.

Attention tends to be concentrated on the slow paying cus­tomers when deciding how to improve cash flow from debtors, but it should not be forgotten that an improvement can also be made by speeding up the better payers. As these are usually the more organised companies it is also easier to find out the infor­mation they require to get the fastest payment from them. As long as ultimate payment is not really in doubt, the expense of getting a debt paid a few weeks earlier by a slow payer may be uneconomic. The measures taken to reduce outstanding debts should, therefore, involve a review of all customers, with the greatest attention being paid to the larger ones whether they happen to be slow payers or not.

Allocation of cash resources is the function of accounts departments and, if necessary, they should be pressed vigor­ously for money. Contacts in the operating departments may be helpful and for large amounts an approach should be made early, preferably before the debt is overdue and certainly before it is causing serious difficulties. If delay seems certain and will cause cash flow problems it may be necessary to go above the management level directly concerned with payment. In order not to generate unnecessary ill-will it is important not to actually bypass the accountant or purchasing manager, but whenever a commitment to pay or otherwise solve the problem is broken the next level should be contacted. Time should not be wasted arguing about the broken promise because, as the request for payment gets further up the line of command, it becomes more likely that it will be made a case for special treatment.

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About the Author: Marie Mayle is a contributor to the MegaHowTo team, writer, and entrepreneur based in California USA. She holds a degree in Business Administration. She loves to write about business and finance issues and how to tackle them.

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