Getting Paid Upfront
“[prepayments] can be done, it's all about relationships and great customer service.”
Cashflow isn’t just something commonly misunderstood by entrepreneurs, it’s a potential business killer. Drama aside, even if your business doesn’t fail because of cashflow issues, properly understanding cashflow can be the difference between growing at 30% a year and 200%.
Here’s how two entrepreneurs, Teddy Ruge, a member of the Ugandan Diaspora and founder of three companies, and Brian Bett, founder of Illuminum Greenhouses Kenya, managed to get their customers to pay upfront or even prepay, and how that transformed their businesses.
Understanding the Basics of Cashflow
We’ll start by looking at monthly cashflow before branching that out to yearly. Let’s say you can sell 140 units per month at $1,000 each, that’s $140,000 in net income. Then, let’s say your expenses are $100,000. That makes for $40,000 in profit every month. Or does it? Those simply numbers can be deceiving, because if you give your customers, say 30 days to pay, then look at your annual cashlow, the numbers suddenly tell a very different story.
Now, your first month has all those expenses but no customer payments. Your second month has your first month’s customer payments along with another month of expenses. It will take several months to turn a profit and your growth will slow. With one month of payment from customers, this model has you earning $630,000 in your first year. Change that to immediate payment and reinvestment in new products and that number turns into $4,360,000.
So, shorter payment periods have an exponential impact on your growth potential, but how do you get your customer on board?
When is it okay to ask for the prepayment?
“It's never okay not to. It's your business, just set the terms and say this is what we're going to be doing”
Brian Bett and Teddy Ruge were both fairly clear that long payment schedules weren’t a possibility. Making that clear required sacrifices on their part but ultimately paid off. For Bett, he failed to sell to the first 5 farmers he approached before one agreed to upfront payments. However, once that precedent was established and he was now building, it became easier to set upfront payment as a standard for his business.
For Ruge it was a bit more complicated, but boiled down to two things: building trust and being upfront. For his customers to be willing to prepay, they had to trust his company absolutely in terms of delivery time, product quality, and customer service. That meant being on top of all three, answering emails right away, keeping open communication, and never compromising.
He was also very direct about what payment options were possible. Once that personal connection was established with the customer, he found it easier to simply say “listen, we need 50% upfront but can get it to you in two weeks” and be believed. Without these payment plans, Bett and Ruge would likely not have been able to get their businesses off the ground.
The result of these cashflow optimizations is that Illuminum Greenhouses Kenya is set to grow at least 100% a year in the foreseeable future, while Ruge has become the larger Moringa farmer in East Africa.
Can you relate to the stories we told here? How is your experience different? We'd love to hear from you. Your questions and comments are what will help us make better lessons in the future.