on August 25, 2017 Cashflow

The only 4 ways a business can get money

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Yes there are only four ways that a business can get money!

1. Equity

2. Borrow

3. From Customers

4. From Suppliers


Equity is pretty easy to think about. You take cash from your personal checking account and put it into your business checking. That is normally considered equity. Lot's of owners will consider at least part of this to be borrowing so let's move on to that topic without delay.

Borrowing comes in all shapes and sizes. Mortgages, Lines of Credit, loans from family and friends, loans from shareholders, and government sponsored loans are common for small business. The main difference between equity and borrowing is that when you borrow, you agree to pay back a certain amount at a certain time plus interest. With equity, you typically don't have set repayment schedules and it's never called interest. 

These are two of the most common and well understood ways that businesses aquire money but let's take a look at an obvious but perhaps often overlooked source of funding for your business: your customers and your suppliers.

Let's say that you purchase a part from a supplier and re-sell it to your customer. To make it obvious, let's say you the bill was for $100 and you resold it to your customer for $125. Where are you going to find the money to pay your supplier? From the customer in this case! Let's say your customer pays you on day 1, immediately after delivery. The supplier sends and invoice and you record that you owe them $100. Each day that your bank balance sits at $125, your supplier has helped keep your bank at that level. It should really be at $25 because you owe them $100.  Your supplier is acting as a bank and financing your business. Managing credit terms with your suppliers can be an important activity and is absolutely required if you are planning any type of growth in sales or inventory. 

Your customers are the last way that you can get money. They provide you with big checks for the work that you do but you have to pay your suppliers, employees and the government for the work that they did to earn that money. You call the difference profit. Profit brings cold hard cash into your business. Until it doesn't bring cold hard cash into your business.

Wait. What?

Those customers may not pay you for 10, 30, or even 90 days until you've done the work for them. You have paid all your bills and are up to date with your suppliers. In this case, you will draw money out of your business and your bank account will suffer. This is a big big issue for a lot of businesses because if you have decided to extend credit to your customers you are acting like their banker. I bet when you started your business you didn't have in your business plan: "we will act like a bank by extending credit to our customers in return for zero compensation". 

Now the absolute best way to deal with this kind of issue is ahead of time. You take a look at the industry, see what the standard payment terms are and try to negotiate for better (Wal-Mart is famous for having long payment terms). If you were to negotiate for net 30 payment terms, you would be saying: "If I finish the work/deliver the product on August 1, I expect to see a check on August 31). So what you will find is that a company ** might ** write a check on August 31, send it to the VPs for signing and approval, then finally send it in the mail to you. This process might take 2-3 weeks. So net 30 really means that once it hits your bank account, its day 50 and your books say that this client is 20 days overdue. 

*** Don't forget to send out your invoices right away *** If you send an invoice and your customer receives it on August 10, they may choose to count the 30 days from August 10 rather than August 1. Sending invoices late can be costly. 

One way around this is to understand the payment terms and the payment methods up front. Before you sign the contract, ask your customer when you can realistically expect payment. Ask them if they can do electronic funds transfers / ACH payments / wire transfers for your invoices. And always add an interest component to your contracts: "interest will be calculated at 18% per year compounded daily on overdue accounts". You want to make sure your client knows that extending credit is not something that you are in the business of doing and there is a price to pay for it.

What do do when your customers are late

So do you ignore problems when they happen? No. If you have a client who is more than 2 days past due, send them a nice email and ask them for payment. make sure you have the right address for the person in the payables department. Make sure they have your invoice and have opened it. Make sure that the approver has approved the invoice and there are no problems (too many hours, wrong quantity, damaged good, etc.). Keep this cycle of communciation going. Make sure that you are always asking about next steps and when to expect payment. Get confirmation and follow up. Yes this is a bit of a process but not doing it will cost you a lot of money. 

If you are dealing with certain products in certain countries, there are government programs that offer insurance on your receivables. So if you don't get paid, you can get most of your money back.

Pay when Paid

My last thought is for sub-contractors. If you are in a situation that says that you will get paid when your contractor gets paid by the end client, you ought to consider making a better contract next time. You are now reliant on this company's processes to get you your money and it shouldn't be your problem. You did the work and deserve to get paid. 


Chris Yaren

Chris established Accountifi because he saw that small businesses needed help that they weren't getting from typical accountants. Accountifi's vision is that small businesses don't make preventable mistakes and have the best possible processes in place.