Few people actually go into a business transaction with the intention of not paying the other side. But sometimes things happen, and it’s not uncommon for one business to “stiff” another because of a change in circumstances.
There is an untold number of things that can kill cash flow and make AP a complete nightmare, to include your largest client deciding (unilaterally) to change payment terms, rework to fix a large project, and unexpected vendor/materials costs. Then there are pesky nuisances like recessions, labor strikes, natural catastrophes, etc.
As anyone whose been in business for a while can attest, fixing cash flow issues does not happen overnight without a major influx of no-strings cash. The effects of these tough times can take months — if not years — to correct. The stress level while it’s happening can be extraordinary, which often is accompanied by lots of second-guessing and soul searching.
The problem is that a company experiencing cash flow issues is infected with a sickness, which it then spreads to other businesses by being delinquent on everything from cash payments to the delivery of goods. It’s like an outbreak of bad finances.
There are a few things all businesses can do to inoculate themselves and avoid paying for the mistakes of others — or at least not suffering as much when those issues happen. Here are a few affirmative steps to consider:
Use engagement letters or other agreements that set forth payment terms/remedies. A solid contract can help you secure an advantage when things go bad. These advantages can include recovery of interest on unpaid amounts, attorney fees for collection efforts, and even the ability to take judgments on delinquent accounts. You can eventually be made whole if those things can be recovered. Conversely, you are paying out of pocket for the mistakes of others if you can’t.
Reaffirm penalties and remedies in your invoices. Statements such as, “All sales final,” “Interest of 1 percent per month will be applied to any unpaid balances after 30 days,” and “Buyer understands that seller disclaims any warranties” can make a difference if a lawsuit need be filed.
Ensure contracts have forum and jurisdiction clauses. There is nothing worse than being sued in another jurisdiction on a relatively small amount of money — and being helpless to prevent it. Occasionally, having to fight in an unfavorable venue can force a settlement in a case that otherwise could be won. Make sure your contracts allow you to resolve any disputes in your area, under your law, and in a more favorable way.
Use credit applications on customers seeking terms. Credit applications and agreements are a simple and useful way of setting forth the parameters of any financial agreement. They also provide opportunities to obtain a credit card backup for any unpaid balances and to get credit references. Don’t be shy about checking references. That’s what they are for.
Stay on top of AR. It may sound silly, but there is no shortage of businesses that are dilatory and sheepish in asking to be paid. They are late on invoicing and don’t assert their right to be paid for one reason or another. If your personality doesn’t allow you to be effective at this end of the business, find someone who is better suited.
I always said my moods as a business owner were dictated by cash flow. Take a few steps early this year and you’ll stay smiling and cheerful.