Credit plays an important role in your cash flow — both the credit you receive from your suppliers and the credit you extend to your clients. If you do not pay your debts in a timely manner, it can reduce your access to credit in the future. Limiting your clients’ ability to purchase on credit increases your short-term cash flow but may limit your customers’ ability to make larger purchases in the long-term. A liberal credit policy can increase your sales. However, the increase in sales must be balanced against the cost of administering a credit program including collections and bad debts.
If you sell on credit, establish a credit policy and stick to it! It is important that your customers sign a contract or a credit application. State when interest will begin to accrue and disclose the specified interest rate and terms for balance due. Clearly disclose your right to sue or arbitrate in your home county. The contract should state that you are entitled to recover attorney fees and court costs.
Consider offering a discount for businesses that pay by cash or within X number of days of invoice. This may slightly reduce your revenue but will ultimately increase your cash flow as it encourages customers to pay in a more timely manner, and reduces the cost of administering your accounts receivable and the level of unpaid accounts.
You must register as a finance company if you extend credit to your non-business customers. Registration is completed through the Uniform Consumer Credit Code (UCCC), Colorado Office of the Attorney General, 1525 Sherman Street, 5th Floor, Denver, CO 80203. Credit sales between two businesses are considered private contractual agreements and are not subject to the UCCC.
It may be required to be in business for a period of time before you will be able to accept major credit cards. Credit cards are normally processed by banks. Contact your bank for more information on credit card policies or for a referral to a credit card processing service. Credit card processors collect a fee for processing credit card payments, usually a percentage of the sale which obviously reduces your cash flow. Take care to shop and compare the costs of these services.
Pricing and Sales Strategies
Your pricing strategy is an important part of your firm’s cash flow and profitability. You must clearly understand your market, the competition and your customers to determine the proper price for your products or services. See the Marketing chapter of this guide for more information. A common mistake is to simply track and focus all efforts towards increased sales. While this might appear to increase cash flow – be careful. If your customers purchase on credit, you may simply reduce inventory without any cash to replenish stock for the next customer. Another problem occurs when sales increase beyond your capacity to satisfy your customers in a timely fashion. As a result, your sales increase in the short term, but your customers are less likely to provide repeat business or give you positive referrals. Remember, more sales don’t always equal more profit!