Return On Expenses

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Return On Expenses: Expecting returns on expenses seems contradictory. How can you earn money on what you spend? There are several areas to target and we will examine each one in this series. The first is using your credit policy wisely. Do you invoice your customers on a regular and prompt schedule? Your customers can not pay for items or services not invoiced and the longer it takes for them to receive an invoice the more likely it will be that payment will be delayed. While you will have paid vendors and payroll you will be waiting for payment and perhaps financing your operation costs with interest bearing loans.

Make sure you describe clearly your terms and collection policies to your customers. Most customers will assume 30 days terms if you do not tell them differently. And think about what your terms are prior to extending credit to customers. How long can you afford to carry the cost of credit? And remember cost includes all expenses incurred to produce the product or service you are selling and the cost of carrying that expense. Even if your cash flow allows you to extend credit without borrowing yourself, there is a cost of someone else using your money and that expense should be added to the cost of the sale.

Will you offer a discount for early payment?

Will your margins allow you to offer this discount and still make a profit?

Do you have the ability to track when a discount should be allowed and will you rebill for that discount should the payment not be received in time but the customer stills takes the discount? These are all important questions to answer before you decide to offer credit to your customers. If you do not take the time to answer them you risk your cash flow, profits and perhaps your business’ success.

If you do decide to offer credit to your customers it is very important to have a easily maintained receivables aging. This document is standard in almost all computerized accounting systems. It will break down your outstanding receivables into several categories based on the age of the invoice date. The most common categories are current, 30 days, 60 days, 90 days and over 90 days. And you must be willing to make the phone calls or send the letters to ask for delinquent payments. This is one area that many business owners are reluctant to do. And please remember there are laws in place that prevent you from making threats, using unacceptable language and harassing people. The best way to handle delinquent clients is to politely explain why you are calling or writing, ask if there is a problem with the product or service they received and if there is to offer a solution to correct the issue. Should it be a case of the client not having the funds to pay in full at this time you may want to suggest a payment plan that they can stick to. And get it in writing with their signature along with a clear explanation of what the consequences of non-compliance will be.

Of course by carefully checking their credit references you may avoid all of the above. Ask for the name of their bank and at least three business references with addresses and account numbers. And follow up on their references. Check to see if their references are real (are they listed in the phone book for example). Call their references and ask how long have they been a customer, what is their payment experience, have they ever paid late. There are also services that provide credit reference checking at a small fee.

Extending credit to your customers can increase sales if you are prepared to do the work that is necessary to keep your costs down and your customer payments timely.
Source by Donna MacMillan

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