Whether you’re just starting out in your own business, doing a little work on the side, or you’ve been serving clients for years, cash flow is one of the trickiest parts of running any business. And the coronavirus pandemic has definitely added some extra pressure. In many cases, successfully managing cash flow is the difference between a thriving business and one that closes. In fact, cash flow problems are one of the top reasons for the failure of startups and small businesses, according to SCORE and many other business news sources.
A business’ cash flow can be affected by many different factors — including overspending on routine expenses, underestimating sales volume, and poor accounting — but one of the key elements is slow or ineffective invoicing. And that makes perfect sense; after all, if your customers or clients aren’t paying you on time, then you’re not going to have any cash flow, and your own business might start to be late paying its bills.
Following best practices for invoicing can help avoid these problems, as well as improve relationships with customers, and decrease misunderstandings. You will inevitably encounter customers who are late payers, but having solid invoicing procedures in place will help minimize their negative effects.
1. Invoice ASAP
After you’ve completed a project, a product, or an assignment for your customer, prepare an invoice and submit it to them as promptly as you can. After all, the more you delay in sending it to them, the longer it will be before you get paid, even if they are generally swift to do so. Also, your invoices must be sent electronically, unless your customer requires otherwise. Simply put, paper-based invoices sent via the mail are inefficient, slow, and have greater potential for theft.
You may also have arrangements with some recurring customers in which you’ve agreed to invoice them at set periods, which may be monthly or on some other schedule. In these cases, you should still have your invoices prepared and ready to be sent as soon as the agreed-upon date arrives.
2. Provide Details
Ambiguous invoicing is bad for your own record keeping, and it can slow down your customer payments. This is because it may cause customers to have to go back through their own records to determine exactly what you are billing them for. Don’t simply offer a billing line item for:
- “writing services”
- “phone holders”
- or “yard work”
You should instead offer greater detail so everyone knows exactly what the invoice is for. An invoice will be more successful if it includes line items such as:
- “Writing of project X for March 2017”
- “creating and sales of 15 pink iPhone 6+ holders with company ABC logo, at $X each”
- or “February 2017 lawn care, mowing, planting of 4 ferns, removal of stump.”
Producing invoices swiftly also helps when it comes to providing detailed information since the project or product is still fresh in the memory.
Invoices should also have a unique invoice number, allowing better tracking by both your customer and yourself. You should also include purchase order numbers (if your client uses them), as well as your direct business contact at the client business, particularly if multiple people are involved in approving and paying invoices. Additional notes can be provided if there were unexpected issues regarding your service to the client.
3. Brand Your Invoices
Your invoices are a reflection of your business just as much as your business cards are. In fact, once they become a customer, your contacts may see your invoices more frequently than your cards. This is why it’s important to make sure your invoices not only include all of the pertinent information about what you are billing them for, but also your company name, address, phone, website, email, and your full name (or that of the billing contact at your business).
4. Automate Your Invoicing Process
If you’re using Excel spreadsheets or Microsoft Word to produce your invoices, you’re doing it wrong. Small business management software can help keep track of details while you’re performing work for your customers, and can automatically populate invoices with their company information as well as standardizing product or service descriptions, your rates or fees, and other factors. These systems also offer emailing of invoices directly to the client, which is much easier and safer than email attachments, and the systems keep track of which clients have paid, when, and how much — they’ll even keep track of details such as taxes. Automating your invoicing functions results in much more efficient practices, a reduction in errors, better client relationships, and more timely payments.
5. Accept Online Payments
“The check is in the mail.” It’s the 21st Century, and nobody should have to hear that phrase ever again. Modern electronic payment methods such as EFT, wire transfer, and even PayPal make it simple for businesses and clients around the world to pay each other quickly. Payables departments may use automated payment systems on their end that schedule vendor payments during certain times of the month or shortly before due dates, but the process is still much more reliable and efficient for both parties. Digital payments are also more secure than having a check in an envelope sitting in your postal box.
6. Due Dates, Penalties and Discounts
There is a due date on your invoices for a reason: You don’t want to wait a year for payment. When initially agreeing to provide service for your client, payment arrangements should be agreed upon, including setting due dates, offering payment terms, and preferred payment methods. First, consider the value you may receive if you discount your price for early payment. In some industries, it is common to have discounts based on how quickly the customer pays their bill. As an example, terms may be listed on an invoice as 3/Net 10 or 2/Net 30: This means that the customer will receive a discount of 3 percent if they pay within 10 days, or 2 percent if they pay within 30 days. The discount amount and time frame should be agreed upon during initial discussions between the small business and the customer. In some industries, and when dealing with customers who are very large corporations, longer billing and payment cycles may be the norm.
While discounts can encourage early payment, penalties can help deter late payments. Once again, any such terms should be fully disclosed and agreed upon and should be plainly noted on the invoice. Although late penalties are more common in consumer billing (phone, utilities, rent), they are not as routine in business to business dealings since they may appear to diminish the relationship.
7. Late Payments: Remind and Collect
Few people dreamed of being a debt collector when they were young, but small business owners must occasionally perform these duties. However, while the matter of the payment they owe to you may seem personal, it is important to remain dispassionate about the task. You must remain professional and cordial, particularly if the client is one which you would like to retain a business relationship with. In most cases, the customer has just overlooked the payment and will remit it promptly, but some may require more prodding and reminder phone calls. Be persistent, though, and you will likely receive your compensation.
8. Respect Your Clients and Communicate Clearly
Many of the potential pitfalls with invoicing clients, and receiving prompt payment, are due to poor communication. Maintaining positive communications with your primary contact, and ensuring that invoices are sent to the correct person and have adequate descriptions, will help minimize problems with being paid in a timely way. Your relationship with your clients should be one built upon mutual respect: They appreciate your service or product, and you appreciate them as a customer.
Following these guidelines will help you improve your invoicing process to ensure your are paid swiftly and without issue.