B2B business models often provide a recurring revenue stream to startups. This can result in a high Customer Lifetime Value (LTV).
However, getting B2B clients to pay on time (or at all) is often tricky. Patricia Teullet recently brought this subject to attention during CADE Ejecutivo, a forum for business leaders in Peru.
For cash-starved startups clients’ payment policies can have real consequences on cash burn and financing needs. If you go after large clients, keep in mind that not only is the sales cycle is long, the payment period is also long, sometimes 60 to 90 days.
Clients often have set payment schedules and are usually inflexible. This can cause accounts receivable for B2B startups to increase. As founders and investors watch revenue growth, they should also keep a close eye on account receivable.
I recently received some ideas from Saul Chrem, co-founder & EVP Marketing and Business Development of Xertica. Xertica is a successful B2B business in Latin America.
Here are some tips Saul and other founders have offered:
- Charge for setup, implementation and pilots. You may be surprised that clients (especially the ones that will provide long term value) will be willing to pay for this work.
- Be explicit in the terms of service. Add into your service agreements not only consequences of shutting off the service, but also fees for turning it back on.
- Incorporate accounts receivable into your metrics. Your true LTV will be lower than you think if your customers are paying late (or not at all).
- Track accounts receivables by due date and plan ahead to identify certain cut off dates.
- Create automatic alerts prior to cutting off service. The more automatic these messages seem, the better. This is profesional and is an effective way to avoid awkward and inefficient calls to collect payments.
Rather than turn away clients, these practices will help filter out less interested clients. If you start with, and stick to, these principles, you will train your clients to work within a scalable process. This will allow your startup to achieve growth with a healthy group of clients that will provide sustainable LTV/CAC ratio.