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If you've been in business for any length of time, the situation is familiar. Big corporations have an easy-to-learn secret to effective cash and credit management: by paying late, they effectively borrow money from their suppliers. Unfortunately, if you sell to other businesses, very often you are the unwilling creditor.
That's why every cash management policy should begin with a simple analysis of the average time it takes you to collect money due to you versus the average time you take to pay your bills. If you pay faster than you are paid, you are subsidizing your customers. But if you take longer to pay your bills than your clients take to pay your firm, then they are subsidizing you.
The vast majority of businesses, even the smallest, already have a credit policy of some sort in place. If your customers pay you only after getting your products or services—and if most of your clients are other businesses who pay you after getting an invoice, this is certainly the case—then you're already extending credit.
If you want to deal effectively with customer credit, stop thinking of your clients as potential deadbeats and start thinking of them as businesspeople making rational choices about where to get the least expensive financing. If you want your customers to pay more quickly, start charging them higher rates for financing—or offer deeper discounts for swift payment. But remember that with the right credit policy, customers who routinely pay late can be a profitable segment of your clientele.
Good bill collectors are often sharp amateur psychologists. In many cases where payment from other businesses is slow in coming, your debtor wants to pay but has a cash flow problem he's not willing to admit. Rarely does a business owner tell a creditor that he can't pay until next month because he simply doesn't have the money. That's why you should be ready to propose a payment plan that will let your debtor save face while giving you your money over a longer period.
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