Small firms often face the problem of inability to collect the receivables of the firm. Despite their on-time delivery of the goods and lack of any issues, the clients of the small firms fail to make the payment on time. This may lead to cash crisis for the firms who depend on such liquid funds.
Many firms even indulge in the debtor financing wherein their receivable, which may run to large amount, is used as collateral to get finance. This is recently used as a great way of getting easy finance. Other than this the firm may try to be much more efficient in managing the account receivable to ensure that their collection is also made on time.
Increase volume of cash sales
Firstly, try to reduce the credit sales as this only leads to greater risk in the small firms. Make sure that you encourage cash sales by offering discounts and special schemes. The credit sales cannot be completely wiped off as you also need to increase your customer base. In case you have to give credit sales then try to check on the credibility of the client so that you can be assured of on time payment. Also, make use of the debtor financing facility to overcome any cash shortages.
Another practice that can be adopted by the small firms is to collect some amount for the credit order as a deposit. This can help in tackling the cash crunch to some extent. Deposits that are non-refundable ensure some extent of commitment from the client’s side too. Also, it is a kind of guarantee that the order does not get cancelled.
Set Payment schedule
Small firms may also plan for a payment schedule in case the order is extended over a period of time. In some cases like custom made furniture and likewise the product is delivered only on completion which may take some time. In the meantime there is a need of finance to complete the work. The firm can ask for amount in fixed percentage of the total amount of the product and schedule the payment on the basis of the stage of completion.
Credit limits is must
Always set credit limits for the clients in case you have to go for credit sales. Limits must be set based on the credit worthiness of the client and their previous records can be used as a basis.
Lastly, make sure that you continuously monitor your accounts receivables accounts and check for older accounts. Take necessary stringent action to collect the amount as and when it becomes due. This ensures that timely recovery is done for better cash flow.