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Cash Discounts can speed up Collection

Christmas is approaching and your small design business is a little hungrier than usual for cold-hard cash. You owe your contractors and suppliers and there are presents to buy for your loved ones. You know there is earned profit out there in the world, but your customers are under the same pre-Christmas pressure. What can you do?

Calculate the Value of your Discount Options

It’s time to pull out your calculator, a sheet or two of A4 paper and a biro and quantify what discounts you can offer to incentivise and speed up payment. Step away from your computer… it’s not about using powerful software, but about making tactical and strategic decisions.

The question is how much better or worse off will your business be in the big picture. Make a column for full payments owed… a column for a 2% discount offered… and a column for a 5% discount offered. The rows down the page should list your outstanding client accounts. Once you’ve done that you’re ready to make a decision.

Don’t be Impolite or Sarcastic

It’s difficult for small business to figure this out but don’t take the debt personally. Remember that a human being with their own financial pressures approaching Christmas will read any letter that you send saying – “PAY NOW OR ELSE” – whether it’s direct or veiled in sarcasm. Their reaction may be negative. And just because someone is a little late paying their account doesn’t mean they’re bastards.

Sometimes they’re caught in short-term finance issues that are partly out of their control – for example, their client hasn’t paid them yet… or an unexpected bill threw them askew for a few weeks. Just be understanding.

Pre-Christmas Amnesty Discount

If you can afford to lose 5% of that debt you might consider allowing it as an amnesty for overdue accounts paid in full before a certain date. So if you’re owed $2000 then you’re offering $100 discount if they pay in full within two weeks.

Don’t think about the $100 you might be forfeiting… if you can afford the short-term hit then it’s a sound business initiative because money in your account is far better than money in their account – you can use it to pay your own short-term financial obligations.

Cash Discounts in your Credit Terms

The problem you face in collection of outstanding credit will always be that smart businesses like to receive money as early as possible and pay as late as possible. It’s in their interest on a 30 day invoice to pay on the 30th day – it leaves more cash in their account for everyday running of their business. Why would they pay earlier?

Pay later and collect earlier should be your motto… write that one on the office wall.

You might consider offering all of your accounts a 2/10 net 30 cash discount. In English that just means you offer a 2% discount to any customer paying cash before day 10 on invoices that say pay by day 30. This is pretty standard stuff to incentivise early payment.

Play around with the Strategy a Little

You might try a 5/10 net 30 cash discount and see how fast your clients want to collect their $100 discount off that $2000 bill… but don’t go further than you need because it’s all about providing incentive so you can move cash into your bank balance faster. Try the 2%… nudge it around a little with trial and error to see how this pans for your business clients.

Aim to Collect Early and Pay Later

Ultimately you should aim to push that collect early and pay later financial strategy across your business. But that doesn’t just happen out of good luck – it’s in your court to work out ways to incentivise early payment. Another idea is that you might offer customers a free, or reduced cost, pre-Christmas service to those who pay outstanding accounts early.

Just pick up your calculator, a few sheets of paper and a pen. Be creative. Understanding your business and its customers will provide you with clues… and remember, nobody is out there trying to rip you off… it’s just about doing good business.

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About the Author

Steven Clark Steven Clark - the stand up guy on this site

My name is Steven Clark and I live in the Derwent Valley in Southern Tasmania. I have an MBA (Specialisation) and a Bachelor of Computing from the University of Tasmania. I'm a mazer & a yeast farmer (making beer, fruit wine and mead as by-products of continuous improvement in my farming practices). I'm a photographer, although my film cameras are currently silent. I do not tolerate idiots. I do not tolerate bigotry. I do not tolerate excuses. Let's be clear, if you sit with my enemies you my are my enemy for life.

Blogger. Thinker. Brewer. Drinker. Life partner to the amazing and incredible Megan.

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