One of the most frustrating issues for any business owner to deal with is the uncertainty of cash flows. This problem is multiplied when you experience periods of rapid growth. When you receive a new client you often have to pay for wages and inventory that relate to the sale before you have even billed for the work. Depending on your payment terms and how good a payer the client is, you then have to wait weeks, perhaps months for payment from the client. If you operate in an industry where profit margins are quite thin, it may take you 6-12 months before you become cash positive with a client.
Then there is also the collection risk that you have to carry. If you have a client that is struggling to survive, their outstanding invoices can easily slip out to 90+ days and if they go into liquidation, that bad debt could represent more than the total profit you have made from the client since they have been with you.
Direct Debit
One of the ways to alleviate this problem is to direct debit your clients account in accordance with your payment terms. You have probably seen this method used by some of the larger telephone and utility providers. This is now a simple and affordable option for SME's to use to get some certainty into their cashflow.
The service is managed online by a third party and can be cancelled at any time by either you or the client. This overcomes any doubts the client may have about allowing you to direct debit their account if the relationship is discontinued. You can set it up to direct debit from the clients bank account or credit card and you can set it up as a recurring amount or go in and edit the amount for each payment.
