Get Paid Promptly – 10 Practical Tips to Improve Your Cash Flow
“Cash is king!” And, running out of cash is the most common reason that businesses fail.
This article is about practical tips to reduce your risk that slow or late-paying customers will cause a cash crunch in your business.
Finding out that a customer for whom you’ve just done a large project has gone into bankruptcy is bad news.
Here are some practical tips to avoid collections problems.
Tip 1. Put it in writing.
Contracts are important! The contract should clearly define the scope of work and payment terms. It should also clearly define the responsibilities of each party, including things you may not think of, such as permits and fees, necessities like scaffolding or temporary heat, and even responsibilities for trash removal may be clearly stated in the contract. When it comes to contracts, the more you define in advance, the better off you’ll be. If you have your agreement in writing, you are much better positioned to pursue your legal remedies if the customer doesn’t pay.
Tip 2. Accelerate the receipt of cash.
Require deposits or payment up front. Accept credit cards. Insist on ‘payment on delivery.’ Offer incentives for prompt payment (e.g., 2% discount if paid within 10 days). Be cautious about extending credit. Check credit history. You may even want to implement the use of a credit application with a personal guaranty. Ask for references.
Subcontractors and sub-subcontractors should be wary of the “pay when paid” clause, which would condition payment to you upon receipt of payment by the General Contractor from the Owner.
Tip 3. Set up a system.
Invoice promptly. Set up a system and follow up promptly on all late payments. At least monthly, review all unpaid accounts and call or send a follow-up reminder notice. Call the customer and politely ask if there’s a problem and when you can expect payment.
Tip 4. Stop work if payment is not received in a timely manner.
Don’t continue to provide goods and/or services to a customer who is behind in payments!
Be careful not to get too far ahead on work while being far behind on receipt of payment. Contractors on large projects must be careful and weigh their options. Courts in some instances have held subcontractors to be in breach of contract for abandoning a project even when the subcontractor has been owed money.
Tip 5. Don’t wait.
Don’t wait longer than 60 or 90 days, because the longer the account goes unpaid, the lower the probability of collecting. It’s time to call in a professional when you can’t get any response from a customer, or the customer repeatedly fails to follow through on promised payments.
Tip 6. Keep a cash cushion.
It’s important to have cash reserves to fall back on. Some businesses try to maintain 45 days of working capital (that is, sufficient cash resources to cover 45 days of expenses).
Establishing a line of credit with your bank can help to cover times when cash is short and you need to cover inventory purchases, meet payroll during the slow season or cover unexpected expenses. Using credit cards to finance your business is expensive but can be an effective bridge over cash troubles.
Tip 7. Spend Carefully.
Expand only when revenue projections are solid. Buying equipment, increasing advertising, hiring people, building inventory – in anticipation of increasing revenue – can quickly cause a cash crunch. If revenues don’t increase, expenses overtake revenues.
Tips to conserve cash include: Barter: The ancient practice of bartering — trading for goods & services. Sometimes you can trade informally with your business partners, to obtain needed goods and services for your business without cash; Buy ‘Used’ or Lease: Shopping for secondhand office equipment, store fixtures, computers and copiers can save you big dollars. Leasing equipment can also reduce your cash requirements up front.
Tip 8. Plan ahead; put money aside to pay taxes!
Be sure to plan for expenses that occur annually or quarterly such as taxes and insurance. Put money aside to pay taxes. The tax authorities expect to be paid on time and in full. It’s important to reserve funds for the timely payment of taxes (sales, payroll, & income taxes).
Tip 9. Pursue legal remedies.
If patient and persistent follow up doesn’t work, there are a number of legal steps –
Small claims – for amounts up to $ 2500 in MA, you can file a small claims complaint in your local district court (without a lawyer). This requires appearing in court and convincing the Judge or Clerk Magistrate that you are owed the money. Documentation is critical. If you win (obtain a judgment) you may get paid – or you may have to go through another stage (called Supplementary Process) to obtain payment.
Mechanics Liens – are available for contractors and subcontractors. This means that the real estate is “attached” and your claim is protected. The property cannot be sold or refinanced, and construction loan disbursements cannot be made, without “dissolving” your lien by payment or escrow. In certain circumstances, partial releases are given for partial payments but be careful! Many partial releases include a general release that releases all of your rights! Read carefully before you sign!
To obtain a Mechanics Lien, you must have a written, signed contract with the owner, general contractor or subcontractor and performed “the erection, alteration, repair or removal of a building, structure, or other improvement to real property.” You must follow the procedure and date deadlines meticulously. The “Notice of Contract” must be recorded with the Registry of Deeds within 30 days of the last day of a person working “by, through, or under the general contractor” on the project (this may include work on the “punch list” or “warranty work”). The Statement of Account must be recorded within 120 days of the last day on the job as stated above. A lawsuit to enforce the lien must be brought within 90 days of recording the Statement of Account, and you must record an attested copy of the Complaint within 30 days of filing suit. Mechanics Liens expire if not pursued.
Real Estate Attachments –To obtain a real estate attachment, you have to file a lawsuit with a verified complaint or affidavit (statement under oath about the funds owed) and show the Court a “likelihood of success of the merits” of your case. There must be “no policy of insurance” held by the defendant to cover the claim. Property must be owned in the defendant’s name. Property owned jointly or as joint tenants with rights of survivorship, can be attached.
Bank Account Attachments –If you know what bank your customer uses (or have a copy of a check), you can try to attach the accounts in the bank. You need to file a lawsuit with a verified complaint or affidavit and name the bank as a “Defendant Trustee” and you have to show the Court the likelihood of success on the merits.
Moving “Ex parte” – without notice to the other side.
An effective technique is to move to attach real estate or bank accounts “ex parte,” which means without notice to the other side. Many times a plaintiff moves ex parte because the defendant has avoided payment of outstanding debt, and the plaintiff believes that if given notice, the defendant will transfer the property or the funds in the bank account.
Tip 10. Prevention is better than cure.
While the legal remedies are effective, they are costly. So, it’s much better to reduce your risk of slow or late paying customers by implementing business practices that reduce your risk of a cash flow crisis. By working proactively with a business attorney knowledgeable in this area, you can reduce your risk – and be positioned to take advantage of legal protections, as needed.