Lynda Moore wonders why many business owners procrastinate when chasing up overdue debts

I had a conversation with a client last week who has quite a few overdue debtors. He knows the money is owed to him, he knows the invoices are overdue, and he also knows that the situation is putting pressure on his own cash flow. The problem is that he isn't quite sure how to approach his customers about getting paid. He has got to the point where he has already written the debts off and resigning himself to never seeing that money. 

It got me thinking about how interesting the psychology of getting paid can be for small business owners. On the surface, it sounds like a very simple problem. You have done the work, you sent the invoice, the payment is due, so you ask for the money. But if it were really that simple, there wouldn't be so many small business owners carrying large amounts of money owed to them while simultaneously worrying about how they are going to pay their own bills.

For many business owners, the difficulty isn't knowing that they need to get paid. It is the discomfort that comes with asking someone for money.  I know I struggle with this myself in my own business.  It was one of the first tasks I delegated to my office manager.  It was also one of the best decisions I made. Having someone in your business dedicated to making sure you get paid, makes such a difference to your stress levels. 

There can be a surprisingly strong emotional reaction to it. You may worry that the customer will think you are being difficult, that you are damaging the relationship, or that they will decide to take their business elsewhere. If you have a good relationship with the customer, you might feel particularly awkward about suddenly becoming the person who is chasing them for payment.

So, you give them the benefit of the doubt. You assume they are busy. You think they might be having a cash-flow problem themselves. You tell yourself that they will probably pay next week.

Then next week becomes the week after, and suddenly an invoice that should have been sitting in your bank account 30 days ago is still sitting in someone else's.

This is where the psychology becomes important, because the longer you leave it, the harder it can become to deal with. What started as a simple overdue invoice can turn into an emotionally loaded conversation. You aren't just asking someone to pay an invoice anymore; in your head, you are worrying about whether they will be annoyed, whether they will think badly of you, and whether you are somehow being unreasonable.

Meanwhile, your own bills don't wait.

Your suppliers still want paying. Your staff still need to be paid. Your GST still needs to be paid. The mortgage, rent, software subscriptions and all the other costs of running a business continue regardless of whether your customers have paid you. You can be doing good work, generating sales and even showing a profit, yet still find yourself short of cash because the money you have earned is sitting in somebody else's bank account.

That is one of the great frustrations of small business. You can end up effectively financing your customers' businesses while wondering why your own cash flow is so tight.

So how do you stop getting to that point?

The first thing is to make getting paid a normal part of the process rather than something you have to personally negotiate each time. Your payment terms should be clear before you start the work, your invoices should clearly state when payment is due, and you should have a process for what happens when an invoice becomes overdue.

That process is important because it removes some of the emotion from the situation. Instead of having to decide every time whether you are going to chase someone, you simply follow the same process you have established for everyone. A reminder before the due date, a follow-up when the invoice becomes overdue, and then further action if it remains unpaid.

It also helps to keep an eye on your debtor list regularly rather than discovering three months later that several customers owe you significant amounts of money. The earlier you have the conversation, the easier it generally is. A polite reminder when an invoice is a few days overdue is a very different conversation from trying to recover a large outstanding balance that has been sitting there for six months.

Another useful change is to think about how you structure the work in the first place. If you regularly have large amounts of money tied up in unpaid invoices, perhaps you need a deposit before starting the work, progress payments during a larger project, or shorter payment terms. For some businesses, particularly where a job involves significant materials or a lot of time upfront, asking the customer to contribute before the work is completed can make a substantial difference to cash flow.

And then there is the boundary that many business owners find hardest of all: deciding when you stop doing more work for someone who hasn't paid for the work you have already completed.

That can feel uncomfortable, particularly when you don't want to lose the customer. But there is a difference between being difficult and having a reasonable business boundary. If someone has an overdue account, continuing to provide more services simply increases the amount of money you have at risk.

Of course, not every overdue invoice means that a customer is deliberately avoiding payment. Sometimes there is a genuine problem, an administrative error, or a temporary cash-flow issue. Having a conversation with them is often the best approach. You can be understanding about someone's circumstances without removing your own expectations around payment.

I think that is the part that small business owners sometimes struggle with. They believe that being a good business owner means being flexible, helpful and understanding, and all of those things can be valuable. But being understanding doesn't mean allowing someone else's financial situation to become your financial problem.

You are not asking for a favour when you ask to be paid for work you have already completed. You are simply completing the transaction.

Perhaps the biggest shift is to stop thinking of getting paid as the uncomfortable part of the relationship with your customer. Getting paid is the outcome the whole business transaction was designed to produce. The work, the invoice and the payment are all part of the same process.

And if asking for money still makes you uncomfortable, it might be worth asking yourself why.

Is it because you don't want to upset the customer? Are you worried about being seen as difficult? Do you feel that asking for money somehow changes the relationship?

Understanding your own reaction is often the first step to changing it.

Because ultimately, your customers' cash flow cannot become your cash flow problem. Your business needs to collect the money it has earned so that you can pay your own bills, look after your people and keep the business moving forward.

Getting paid isn't rude. It isn't pushy. It isn't personal.

It is simply part of being in business.

*Lynda Moore is a Money Mentalist coach and New Zealand’s only certified New Money Story® mentor. Lynda helps you understand why you do the things you do with your money, when we all know we should spend less than we earn. You can contact her here.