Deposits are good for business

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In my years working closely with business owners in Tauranga, Rotorua, Whakatane and the greater Bay of Plenty area consulting on credit management procedures I have noticed a trend.

Those businesses that ask for and get a deposit before commencing work have less unpaid invoices, less cancellations and less disputes. 

The logical reason for this is of course elementary. 

The less money outstanding at the end of a job, the lower the total amount that could possibly be outstanding. 

The other reasons that I have discovered are a bit more involved. They include:

Client buy-in
The more the client pays up front or during the project, the more they have financially and emotionally bought in, meaning that they are more likely to bring up small gripes and issues earlier on that would otherwise turn into larger disputes or reasons not to pay. 

Smaller problems can of course normally be dealt with easily and amicably.

Invoice shock syndrome
No matter how well a business plans, cash flow is still nearly always contingent on their clients paying them on time. 

So your clients’ ability to pay you rests almost entirely on their own client base, and so on down the line, the day that your $5000 invoice arrives on the accounts payable desk (or inbox) may be the day that the $10,000 invoice payment due over at accounts receivable fails to show itself. 

And as we all know, supplier invoices are usually the cheapest form of short-term credit so in circumstances like this the waiting game begins or a payment plan is established. 

Taking deposits and progress payments is a reverse payment plan and also lessens the impact on your clients and therefore your own cash flow.

Relieve business pressure / improve credit reputation
I have often been told by my clients that one of the scariest things in business is going into debt to procure goods to sell to someone who is not guaranteed to pay you on time, or ever. 

A good proportion of business debtors that we deal with are in the predicament they are in because of this. When a deposit covers materials this issue can be pretty much eliminated. At worst you are left out of pocket for profit and time, not in debt to a supplier and your reputation as a good payer and your businesses credit rating remains intact.

Avoid offering credit to insolvent entities
Credit is only extended once consideration (goods or services) passes from supplier to customer without the payment being made at or before this time. 

If you are concerned that your client is financially struggling or may indeed be insolvent you must under no circumstances extend them credit. 

A deposit and progress payments with the last payment on pick up / delivery avoids the issue of extending credit to an insolvent entity because you are not doing so. 

As I was writing this article I received a phone call from Todd at our local large hardware store telling me that they can order in the boat shaped paddling pool for my four-year-old daughter, adding “but before I order it you will need to come and pay at least 50 percent as is the store policy.”

The pool and freight comes to $104, and I’m sure the 50 percent more than covers both the wholesale cost of the goods and the freight, making the risk of loss on the transaction zero. 

Yet I have clients that in the past have extended credit to complete strangers of $10,000 of goods specially ordered in with no deposit. 

I think you will find the risk of loss is a bit higher than zero on that one. 

One of my main struggles with clients is helping them realize that credit is a privilege not a right. 

Yes in today’s commercial reality, 20th of the following month has become standard and if you have your Terms of Trade, credit checking and other credit management procedures in place you do minimize the risks, but it is your right to ask for a deposit especially if your gut instinct tells you so.

Just a thought.

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Nick Kerr

Nick Kerr is Area Manager BOP for EC Credit Control NZ Ltd. He can be reached at nick.kerr@eccreditcontrol.co.nz

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