Cash is king anyday in the role of an active enterprise. Time and time again you will come to realize as the company grows that among all the things that a company does, two things are most crucial – sales and managing cashflows.
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| Vijay Anand |
In the early stages of the company, just by sheer size or by the processes set within themselves, most of your clients would have a time window between the time you release the finished goods to the time they hand you a cheque – a bit of miscalculation here, depending on the size of the order could lead to crisis within a startup. To manage that, here are some tips to keep in mind:
1. Set expectations early on
In the early stages of a company, at times the teams compromise payment schedules and even the sales quote in an effort to win the deal. While this is not exact science or metric, keep an eye on how many such deals you close – while the first client might drive a hard bargain, unless you recover that amount you lost in your next client win, you are on a path to downward spiral. Keep an eye on that early on.
2. Manage the ratios
As you start growng, never let one client contribute to the majority of the pie of revenues. Constantly find avenues to bring down that risk – especially if that client has a track record of not being regular in payment schedules. As a good strategy, it is good to ensure that no one client contributes to more than 20% of revenue into the company.
3. Always have a backup fund
Unfortunately Murphy is always right and whatever can go wrong, will go wrong when you are trying to run a business. Just like you would manage personal finances, keep an emergency fund with a month or two of cash flow reserve that can be used in case of emergencies. You do require a bit of discipline to recover the money as soon as possible and replenish this fund – lest it starts to erode as well.
4. Incentivize on-time payments
As you start growing, it makes sense to incentivize your clients for payments on time – give them a discount, or a better pricing option – something valuable enough for them to seriously look at it and continue keeping that service from you. And vice versa, write it into your contract that should delays exceed beyond an acceptable limit, there will be some penalization that will be incurred. Be transparent when negotiating early on and explain your situation to them and the cost of the delay so that they empathize rather than feeling punished.
5. Qualify your clients
There are financial instruments available in the market today where you could do bill discounting and avail a significant amount of the receivable, but such efforts do not work unless the client is willing to directly interact with a financial institution to settle the dues – and a proprietory firm or one without professional management might not be comfortable with that concept. Ensure that atleast some of your clients come from this space, to offset your risk partially.
6. Pass it on
It’s unfortunate, but the vicious cycle continues. Everyone in a value chain in a way is going through the delay in payments that at times it makes sense to build a relationship with your vendor so that you can pass on the credit period of your clients onto them. If you are able to keep your timelines in terms of payments they shouldn’t have a problem – after all the very definition of cashflow is to bring in as much of the receivables as possible and release as little as the outflow as possible.
7. Lead by Example
Quite a few of the organizations that I have been part of, have this financial policy to release the vendor payments at the earliest possible – at the latest within a week, in some cases the very same day. The quality of relationships in such scenarios is definitely something which makes the process more enjoyable. No matter how your customers are treating you, do see if you can add a positive experience in that process.
8. Don’t be afraid to say No.
Time and time again you will come across certain customers whom you would be sure would have payment problems, but in an effort to meet sales deadlines and to show higher billing, the sales team might be driven to close them. Make a stand to say no to such clients – no matter who they are.
9. Know your Banker
It worries me at times to note the amount of time that entrepreneurs spend in networking events trying to impress venture capitalists that they forget who the real heroes really are. This is an economy which is still being built by Bankers than Venture Capitalists. Take the time and effort to meet with your banker periodically and maintain a good relationship. They really can make the difference in between being in a hard place vs that peace of mind when something does go wrong.
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Vijay Anand is a serial entrepreneur, the founder of Proto.in, and the Vice President (Incubation) at IIT's RTBI. He tweets at @vijayanands.
To write to the author, please send an email to dare@cybermedia.co.in with the subject line 'Vijay Anand'.
Disclaimer: The views expressed here are that of the author and do not represent the magazine's.
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written by Vuitton, March 15, 2011
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