Globally, all small businesses face them:
1. Being paid late (or not at all).
2. Not understanding the financial position of your business.
3. Being stressed, wasting time, or sacrificing your personal life to keep things afloat.
And the COVID-19 situation is amplifying them.
But identifying the problems that lead to these is very doable, and once the problems are found there is a whole fintech (financial technology) market out there to help you solve these problems quickly and easily.
Start with your order-to-cash process
This is the end-to-end process that begins with you receiving an order from a customer, through to receiving their payment in your bank account. Key steps in this process are:
- Pricing
- Invoicing
- Payment collection
- Reconciliation
- Forecasting
- Financing
- Banking
Mapping out your business’ order-to-cash process can help you identify the problems which hold you back from being paid on time, knowing the financial position of your business at all times, and being able to run your business as efficiently and stress-free as possible.
Advice from the experts
In July we brought together several GoCardless partners to talk about the order-to-cash process - including Xero, GoProposal, QuickBooks, Capital on Tap, Tide, the UK’s Small Business Commissioner, and more.
We pulled advice together from experts across small business, payments, accounting, pricing, financing, and banking to highlight the biggest problems small businesses are facing, and how fintech can solve them.
Some of the biggest potentials for improvement that we saw were in the front end of the order-to-cash process - pricing, invoicing, and payment collection.
Pricing: Main problems and solutions
Being at the start of the order-to-cash process, pricing affects the success of everything you do.
Pricing expert James Ashford, Founder of GoProposal and Director of accountancy firm MAP, says many small businesses suffer from problematic pricing models, such as:
- Cost-plus pricing
- Competitor-based pricing
- The ‘finger in the air’ approach
The problems caused by your poor pricing, however, aren’t felt immediately - which makes them dangerous, especially so when a storm hits you. This could be the arrival of new competitors, losing a major client, losing key staff, or the obvious one right now - a global pandemic.
And the problems are more human than you might realise. James explains:
“Relationship challenges, not sleeping, being stressed and overwhelmed - these are the real problems business owners suffer from. I’ve had very emotional conversations with business owners recently. People in tears, because past mistakes they’ve made with pricing have come to the fore during COVID-19.”
Pricing is never solved, only tuned, according to James. But to start, you need to look at the value exchange between your business and your customer.
Understanding their goals is key to understanding the value you deliver them. That, plus understanding your own business goals and the resource it takes to deliver your customer value, are the foundations of creating an informed, intelligent pricing model.
Fintech solutions - such as GoProposal, for accountants - can help ensure pricing is consistent across your business and client base, saving you time and hassle. However, James advocates starting with Post-it notes on a wall, defining what your pricing problems are, and the goal you’re trying to reach.
Without this, he says, you won’t be able to tell if a solution is successful. Which means you’re opening yourself up to using the wrong solution for your business, wasting your time and money, and possibly making you more change-averse in future.
Ben Johnson, Director of Financial Partnerships at Xero, advises small business owners involve their customers in this pricing process.
"Ultimately, your business needs the right pricing structure to remain profitable, so you can keep serving your customers and even expand your offering to serve them better. Involving just a few close, trusted customers in the process of changing your pricing is going to help you lock down that value exchange, and roll out a new structure which your customers will be most receptive to."
Invoicing + payments: Main problems and solutions
Once you’re confident in your pricing, the process of requesting and receiving funds from your customers is critical to get right. Flaws in this process directly harm your ability to get paid on time, make it impossible to understand the financial position of your business, and are a major source of stress and time-waste for business owners.
Invoicing expert Ben Johnson highlights paper invoices and desktop accounting software as common causes of problems in small businesses. Speaking to the benefits of the fintech alternative, cloud accounting software:
“Ideally you want to be able to raise an invoice, have up to date records, and give your customers a really smooth way to pay it, and that’s all possible today with online accounting software and online payment systems. We already know that people that use both those things get paid 14 days faster and they have a better view of the financial position of their business.”
The connection between invoicing and payments is clear here. Without addressing problems with both, your cash flow and visibility of your financial situation suffers. And unnecessary financial admin will be a time-waste and source of stress for you or your team.
Thankfully, poor payment practices aren’t too difficult to identify. Look for processes that require significant or frequent manual action from your customer, such as monthly manual bank transfers. As well as systems that are difficult to use, or don’t integrate well with your accounting software.
Relying on receiving payments via bank transfer is a common source of problems in many industries. Why? It goes back to processes that require frequent manual action from your customer. Receiving payments via bank transfer means your customers need to undertake the manual act of paying you every month, 90 days, or whatever their typical payment period is.
This takes the power of getting paid out of your hands, and forces you to rely on your customer being timely to ensure you get paid on time. Plus, bank transfers are unlikely to be your customers’ preferred way to pay you anyway.
According to research from YouGov in 2018-19, bank debit - also known as Direct Debit in the UK or ACH debit in the US - is a preferred payment method in the UK and many other countries, for both businesses and consumers. UK businesses most prefer to pay via bank debit in 75% of use cases, with UK consumers preferring it in all use cases.
This makes sense. As a payment method, bank debit ensures both you and your customers don’t need to worry about financial admin when it comes to payment - it’s all handled safely and automatically.
What do you do now?
- Map out your pricing and invoicing processes - What are the steps, who is involved, what technology is involved, and where are the problems or bottlenecks you’re already aware of.
- Look for pricing red flags - Cost-plus pricing and competitor-based pricing aren’t always the wrong the approach, but if you’re using either it can be worth researching other pricing models such as value-based pricing (finger-in-the-air pricing, though, is never a good idea).
- Look for payment red flags - Anything that requires significant or frequent manual action from your customers to get you paid is a problem, as are any systems you use which are difficult or irritating or don’t speak to your other systems.
- Implement the fintech that solves your specific problems
We can help
GoCardless helps you automate payment collection, cutting down on the amount of admin your team needs to deal with when chasing invoices. Click below to learn more.