Making Customer Deposits Work for Your Business Cash Flow

Collecting customer deposits can be a great way for small businesses to improve their cash flow. By requiring an upfront payment from customers before providing goods or services, businesses ensure they have money on hand to cover initial expenses. However, there are some important considerations when implementing a deposits policy.

What are Customer Deposits?

A customer deposit is a partial or full payment made by a customer to a business before the business provides the purchased goods or services. Common examples include:

• Wedding vendors requiring 50% deposit to secure the date
• Contractors requiring 25% deposit to order materials
• Custom furniture makers requiring full payment upfront

Customer deposits give businesses immediate cash flow to purchase materials, pay employees, and cover other upfront costs associated with orders. This improves overall cash flow management.

Benefits of Collecting Customer Deposits

There are several advantages to collecting customer deposits:

1. Improved Cash Flow

The main benefit is the influx of cash before you incur expenses. This cash infusion improves your cash flow and acts as working capital to pay suppliers, employees, rent, etc. while you fulfill the order. Especially for small or new businesses, deposits can relieve cash flow pressure.

2. Weeds Out Non-Serious Inquiries

Requiring a deposit commits customers to an order. A customer unwilling to put down a deposit might not be a serious buyer. Deposits weed out window shoppers.

3. Covers Expenses if Customers Cancel

If a customer cancels an order, you get to keep the deposit to compensate for any money you already spent or work done. This protects from losing money on canceled orders.

4. Serves as Sales Incentive

Offering to put down a customer’s deposit can help close sales by removing financial barriers. This sales tactic gets hesitant customers to commit.

Best Practices for Customer Deposits

To effectively use deposits, follow these guidelines:

• Set reasonable deposit amounts – Request 10-50%, depending on materials and labor costs. Too high seems unreasonable. Too low reduces benefits.
• Take deposits on custom & large orders – Deposits make most sense for specialty, customized, or high-value orders.
• Outline deposit policy requirements – Be clear upfront about deposit amounts, payment methods, refund policies, etc. to avoid confusion.
• Issue receipts – Provide a professional receipt outlining payment details, order details, refund policy, etc.
• Use deposits only for expenses – Only use deposit money on direct order expenses like materials and labor. Do not confuse with general operating funds.
• Refund with care – Issue deposit refunds carefully if orders are canceled to account for expenses incurred. Outline conditions for refunds.

Refund Considerations

With a clear refund policy communicated upfront, customers understand conditions for deposit returns. Useful refund policy guidelines:

• Partial refund if cancellation after materials purchased
• No refund if cancellation under X days before delivery
• 100% refund if seller cancels or fails to deliver

Outline refund policies in your terms and conditions. Be reasonable protecting legitimate expenses incurred for canceled orders.

Customer Deposits in Action

Let’s look at some examples of deposits working well:

Wedding caterer

• Requires 50% upfront deposit to secure a date
• Uses deposit to purchase food, supplies, and pay staff
• Keeps deposit if client cancels to cover losses

Boutique contractor

• Requests 25-50% deposit on remodeling jobs
• Uses deposit to order custom building materials
• Issues partial refund if client cancels after materials purchased

Craft brewery

• Takes keg deposits ~$100 to reserve kegs
• Refunds full deposits when undamaged kegs returned
• Keeps deposits if kegs damaged

In each case, the deposit improves cash flow and protects the seller if orders are canceled. This facilitates business operations.

Handling Customer Deposits Legally

There are some legal considerations around properly handling customer deposits:

Document Agreements

• Use contracts – Require signed contracts outlining deposit terms, conditions, and refund policy details to protect all parties.

Safeguard Deposit Funds

• Separate account – Keep deposit money in a separate business account earmarked specifically for customer deposits only.
• No commingling! – Never commingle deposit money with general operating funds. Legally these need to remain distinct.
• Don’t spend – Do not spend the deposit money until the order is fulfilled as required.

Follow State Laws

• Know requirements – Some states prohibit charging for certain services before they are delivered and have strict laws around deposit handling. Understand your state laws.
• Issue refunds – Make sure to issue deposit refunds in compliance with state laws if orders are canceled or you are unable to deliver.

The Downside of Customer Deposits

While deposits have clear benefits, some disadvantages include:

• Added paperwork & accounting
• Managing separate deposit accounts
• Refund tracking and administration
• Customer pushback

Some customers may hesitate or complain about paying deposits. Clear communication of deposit policies and intent can help overcome objections.

The key is crafting deposit policies and procedures that maximize benefits while minimizing administrative hassles.

Best Practices Summary

To recap, collecting customer deposits can significantly help small business cash flow when done properly. Use these best practices:

• Set reasonable deposit amounts
• Clearly communicate policies upfront
• Use legally binding contracts
• Issue professional receipts
• Safeguard money in separate accounts
• Spend only on direct order costs
• Outline fair refund terms
• Follow state laws

With good procedures in place, customer deposits can provide critical cash flow support allowing small businesses to operate smoothly while fulfilling orders.

I hope this overview on making customer deposits work for business cash flow helps provide useful guidance. Let me know if you have any other questions!