Achieving Cash Flow Certainty and Why It's Important
What is cash flow certainty?
Cash flow certainty is knowing that the sale you just made is going to turn into actual cash in the bank account.
Cash flow certainty is knowing that you can pay your wages and your taxes.
Cash flow certainty is feeling comfortable saying yes when your staff come to you with ideas that cost you money.
Cash flow certainty is a state of confident business ownership. It is a state that generates growth and reduces stress and pressure. It affects culture too as it trickles down into everything from employee satisfaction to customer satisfaction.
If you have ever managed a business that has been uncertain where its next dollar was going to come from, you know exactly what it feels like. It is an awful feeling! Especially if you have staff and bills of your own to pay. Your staff feel your stress, and the stress flows down to customers a lot of the time.
A lot of businesses have cash flow uncertainty. In fact over 54% of Australian business owners have issues with overdue invoices.
For established businesses these issues usually stem from payer behaviour, and more accurately business tolerance of bad payer behaviour.
How Payer Behaviour Affects Cash Flow Certainty
If your payer is conditioned to getting work and not paying you, you will have cash flow uncertainty.
When you do work for someone that doesn't pay you on time, you not only suffer from the loss of on time revenue, but you also lose time better spent on other activities like sales, marketing, system development or delivering for better paying customers. Then you have to spend even more time and capital chasing the payment.
In a white-paper released earlier in the year by Xero, some shocking numbers were revealed. According to Xero, $115 billion in invoices are paid late each year to small businesses in Australia by big businesses. There are even more invoices sent to small businesses and citizens.
The damage late payment causes to the Australian economy is one thing, but the practical implication of being paid late to a small business owner is enormous.
When they don’t have the cash on hand, they cannot spend it. You can’t invest in growing if you barely have enough cash on hand to stay alive.
If have overdue invoices sitting in your accounting system, it is probably for one of the below reasons.
- The customer didn’t feel like they received value so are not paying you
- The customer overlooked the invoice due to email deliverability or some technical issue.
- The customer is having their own cash flow issue which is causing them to hold off on paying bills.
- The customer intends to pay it later but have just not got around to it yet
- The customer has internal policies that mean they pay you on their terms, not yours
In each case there is a tie that binds, you accepted the risk of doing the work before receiving payment. You are essentially issuing your customers credit.
“We stopped being a lender to our clients several years ago and have barely had to chase an invoice since.” Said Tim Davies, founder of Zellis a long term Pinch merchant that delivers digital consultation services to retail businesses.
“We inform our clients that we are a service provider, not a financier.”
Changing Payer Behaviour
One of the things that we hear from business owners often is “my clients wouldn’t do that,” when justifying why they
can’t switch to a cash up front or Pre-Approval mandate style invoicing model. Our data says otherwise.
As of September 2023, over 70% of all of our system transactions were processed by payers on Pre-Approval. The feedback before and after implementation is different, with most merchants reporting their customers having been fine with it and in some cases preferring it. The challenge is especially easy when changing your approach to onboarding customers, as expectations have yet to be set.
Changing the behaviour of your payers is as much about changing your own business behaviour. There are three key members of a business that influence this, and changing the way that they act is key in achieving success in transitioning.
- Who makes the sale
- Who does the invoicing
- Who chases the payments.
These people are not always different, but they are also not always the same.
Sales team sets the first impressions, and the expectations that your new customers have for the way that they can pay you. If you don’t reset the way your sales team and their processes onboard your customers, you can never really fix the issue.
The person doing the invoicing is the main point of contact when it comes to billing and influencing your existing customers. They communicate with them via invoice emails and reminders and tend to triage all incoming accounts enquiries.
The person chasing the payments is obviously the member of the team most committed to getting paid, and has the most challenging job as they are dealing with your existing problem payers generally.
If you suffer from cash flow uncertainty, you need to address the way all three members of your team approach payments and arm them with better systems and processes.
Switching to a Pre-Approvals Style Invoicing Model
One way to tackle this issue head on, is to switch to using platforms such as Pinch Payments for collecting invoice payments, specifically
the Pre-Approvals feature.
A Pre-Approval is an online agreement between a business and their customer that permits the business to charge a nominated payment method, such as a credit or debit card, or bank account. This is also known throughout the industry as a mandate, or commonly incorrectly called a direct debit. A direct debit is a type of pre-approval, in that it is an agreement between the business and the customer’s bank, and with Pinch you can set up direct debit agreements, as well as Pre-Approvals using a nominated card.
When you have a Pre-Approval set up within Pinch, and a connected invoicing system such as Xero, QuickBooks, MYOB or even third party software platforms that connect with them, you can automatically collect payment for invoices you raise on the invoice due date.
By switching to a 100% Pre-Approvals model for all of your new and existing customers you take the pain of waiting away. You may find some customers skeptical of giving you such authority from time to time, but by creating good and consistent processes, alignment through your team members that are involved in the invoicing process and commitment, you can unlock cash flow certainty this way.