By gstockstudio, YFS Magazine
Cash or Credit Terms: What Should I Offer My Customers?
The decision to offer customers cash vs. credit terms is difficult, especially for a startup.
By
John Russell
It’s tempting to demand upfront payment before goods or services are supplied – especially as credit gets tighter. The decision to offer customers cash vs. credit terms is difficult, especially for a startup.
If you want to attract new customers, it is tough if your terms require cash upfront. Moreover, when you eliminate lines of credit for existing customers, it could have a detrimental impact on your business relationships. These customers will likely switch to your competitors where they can get credit. Yet, if you offer too much credit to too many customers, you could experience cash flow problems.
Every business needs to find the right mix between cash and credit. It’s wise to start all new customers on a cash basis. Once a business relationship has been built, and they have a proven payment track record, you can introduce credit terms. In a formal arrangement, customers can buy goods or services now and pay for them later at a mutually agreed-upon date—typically 30, 45, 60, or 90 days in the future.
As a precaution, credit customers can also sign a personal guarantee. Get your lawyer to draft a standard document if you take this route.
If you intend to extend credit to customers must start with a credit policy and keep the following tips in mind:
It’s important to clarify that profit does not equal cash flow. Simply looking at your profit and loss statement does not give you a clear picture of your cash flow. Many other financial figures are necessary to complete your cash flow, from accounts receivable (debtors) to stock, accounts payable (suppliers), capital expenses (plant and machinery) and loan repayments.
Put simply, profit is sales (cash and invoiced) minus expenses. Collecting the money on that invoice is what creates cash.
Positive cash flow is needed in order to generate a profit. You need this cash to buy fresh stock, pay developers, etc. It’s the sale of the inventory or service that helps to generate a profit. If you don’t have the money to pay for the stock, you won’t end up making any profits.
In order to keep your small business on the straight and narrow, follow these top tips for managing cash flow:
Ultimately, make sure to focus on cash flow and not profit. This is a common error of many failed businesses. Avoid overtrading! Keep your banking relationships close. You never know when you might need that short-term loan.
John Russell is Managing Partner of Russell and Co, a prominent accountancy firm in Ireland and Founder of My Start Up. Both companies specialise in helping startups and small business. John is also a published author of Ready Stead Grow – The expert’s guide to starting and running a successful business.
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