Invoicing and Credit

You must take invoicing very seriously. A lot of firms don't and go out of business unnecessarily. They actually forget to send out the invoices they could. (Do they expect their customers to remind them?) The inevitable happens—financial strangulation.

Most successful, cash-rich businesses operate on a policy called negative working capital. This means they sell the goods and get paid for them before they have to pay their suppliers. If this sounds too good to be true then read on. McDonalds had a negative working capital of $698.5 million between 1999 and 2000. Amazon.com estimates they turn over their inventory 20 times faster than superstores and 50 times faster than small specialty bookstores. Dell is another proponent of this technique. If nothing else, it makes it unnecessary to require overdraft facilities or waste time dealing with cashflow crises.

As a software developer, you are the product manufacturer as well, but you might still have to buy in manuals, CDs, packaging, and so on. Treat it as a game and see if you can sell each month's production before you have to pay for it. Realistically what you are aiming for is prompt payment. The advantages are obvious:

♦ Failsafe (no chance of items going out uninvoiced)

♦ Less administration

If you don't take the negative working capital approach the opposite happens. Staff will be tied up pursuing bad debts, and you'll end up funding overdrafts to cover times when debtors are in arrears. It's a no-win situation. Don't even get into it. For small, one-off orders my advice is clear: cash with order. How customers do this is their choice (credit card, check, money order, or cash). Once they pay, it's your call, however, with checks only release the goods after the checks have cleared (typically allow 2-5 days).

Over the last decade, a noticeable change has taken place in the way that large companies buy small products. Ten years ago they'd generate a purchase order, you would then send the goods and an invoice, and sometime down the line a check would turn up. Today they invariably pay on the spot with a credit card. If they still work the old way, blue chip companies are normally a safe bet; although if this is the first time they've dealt with you, there may be some delay while they enter your company details into their accounting system (so you can be paid). So if you get a purchase order, it's often best to phone and check the company's payment procedure. Nowadays, most members of staff have corporate credit cards, which allow them to make small purchases on the spot.

When smaller companies approach you and you have grounds to be wary, ask them to ship a check with their order. While this might appear draconian, it will pay for itself immediately with less administration, higher bank balances, and reduced hassle.

If you have to give credit, you may choose the terms. Although 30 days is the norm, think seriously of the advantages of settling it at 7 or 14 days to bring the money in faster. Protect yourself further by stipulating an interest rate for overdue accounts (typically 4 percent over the bank base rate) on an annual basis. If you don't do this, you can't claim it.

Tip One tip from a senior bank manager about opening accounts for new customers is to ask for three times the amount of credit clearance they say they will actually / need. If there are any impending problems, the exaggeration is likely to reveal it.

If you are worried about people's preparedness to pay up front, don't. Dell turned over $31.1 billion in 2002 and almost all their transactions were done on a credit card/cash-with-order basis.

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