One area of a clients business that I always review is their invoicing and accounts receivable processes. Typically processes are pretty good but there's 5 things I see over and over again that I wish I didn't. Here's my Invoicing and Accounts Receivable - STOP Doing these 5 Things review. As always, if you have a question or think you might want to work together, please get in touch through my Home Page. Also, never miss a blog by following me on LinkedIn or Facebook.
1) Delayed or Slow Invoicing
You are far more likely to a) collect your invoices, and b) collect your invoices on time, if you invoice right after you provide your services or goods. Waiting to invoice is a killer for businesses hoping to minimize accounts receivable and improve cash flow. Based on my experience, even if you wait just 1 week to bill your customers, your cash flow can suffer significantly. The best businesses invoice immediately, you should strive to get there as well.
2) Charging Interest on Overdue Accounts
This always amuses me. First of all, unless you have a services agreement or a contract that was signed by the customer ahead of your transaction, you can't just add that overdue accounts will accrue interest at X% on your invoice. You have no legal grounds to collect that and paying interest is just something that customers have a hard time doing.
I mean, if you really want to go that route, I suggest you get your terms of service over to your customers ahead of them doing business with you; however, for me, if collection is an ongoing concern for you, perhaps you should encourage early payments by offering a discount (just an example, there's many other ways to encourage on time payment!). An approach like this creates a positive experience, it will speed your invoice collection to improve cash flow, and will help avoid super awkward conversations about late invoices and your unenforceable interest charges.
3) Surprise Billing Above Your Quote or Set Price
I hate it, I hate it, I hate it, and TRUST me, so does everyone else. There is nothing worse than working on a project with someone only to be hit with an unexpected bill at the end. Construction, trades, services providers, etc are all guilty of this invoicing blunder and most commonly the route cause is terrible communication.
If the job is changing, you find unexpected problems, or timing issues are increasing costs, please talk to your clients about the issues you are facing. At least this way, the client can either adjust something on their end, or accept that costs are going to be higher than previously discussed. If you don't have this pro-active conversation with your clients, expect significant collection issues and a lot of awkward and unpleasant conversations. In addition, even if you do a great job, the negative billing experience can have a real impact on word of mouth advertising or a potential online review.
4) Having Limited or Unclear Payment Options
I often see invoices that go out to customers without clear payment options or enough payment methods. Here are my best practices for credit cards, electronic funds transfers and cheques:
Credit Cards
If you provide services or goods directly to individuals (B2C), you should offer credit cards as a payment option, especially if your typical invoice is less than $500. Many business owners don't want to pay the 2.9%, but not providing that option is likely slowing your collections and increasing your bad debts (the amounts you don't end up collecting due to a bad customer). Slow collection and the wasted time associated with it, plus not collecting just a few invoices each year probably equals the cost of accepting credit cards. This is something to seriously think about.
If you provide services or goods directly to businesses (B2B), I would say that offering credit cards as a payment method is optional. You should carefully weigh the costs and benefits of allowing them but in either case, you need to have great alternative options.
IMPORTANT - If you create invoices with credit card payment options, make sure you are integrating with a payment provider directly on your invoices, IE, a "Pay Now" button. Stripe for example is a great option to use with modern accounting software.
Electronic Funds Transfer (EFT)
In my opinion, all invoices require electronic funds transfer options.
If you provide services or goods directly to individuals (B2C), I would recommend that you accept a) email money transfers and b) at least 1 other electronic payment option. Your other electronic payment option should be something that integrates directly on your invoices through a "Pay Now" button. GoCardless and Plooto are examples of great options that integrate with most modern accounting software. Please note, these services come with a fee but they are far less expensive than what credit cards cost. The cost of these services is offset by faster collections, less time wasting and less bad debts.
If you provide services or goods directly to businesses (B2B), I would recommend that you provide your bank account details and a remittance email directly on your invoices. This will greatly speed up your collection time as many companies are moving exclusively to EFT payments. If you're worried about "fraud risk", there really isn't much because remember, all the companies paying with cheques include their bank account numbers on the bottom for all to see. In addition, just having your bank account number doesn't give fraudsters any ability to withdraw funds from your account. Finally, as a B2B business, you could also opt for "Pay Now" button as noted above if you feel it will help you.
Cheques
Cheques are dead and accepting them as your primary payment option significantly increases your collection time. My recommendation is to accept cheques, but clearly don't encourage your customers to pay that way. I would note it as the last option on your invoices and also add something like "If required, you can mail cheques to...." to kind of dissuade that option.
5) Not Setting Automatic Reminders or Having Annoying Ones
It used to be the case that significant resources and time went into phoning customers about late invoices; however, that process is largely being replaced by automated reminders through modern accounting software. If you aren't using automated reminders, your cash flow is suffering and you are wasting your time. Unfortunately, I often see that automated reminders are not set up, or they are set up but they aren't customized and they may go out too often. A good automated reminder goes out the day an unpaid invoice is due, and then every 10 days or so from there. The language in each reminder should always be polite, but should increase in urgency the further the invoice has gone. If the invoice is over 45 days old without payment, you can still try emails to get a payment, however, you might have better luck calling the person or business to resolve the payment. At the end of the day, automated messages are great, but they still need to feel personable to have the same impact.