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. In many cases, it’s also the difference between a successful business and one that closes. In fact, cash flow problems are the #2 reason that startups and small businesses fail, according to Forbes (before Covid-19, at least). The number one cause? No market need for their product or service.
A company’s cash flow can be affected by many different factors, from overspending on routine expenses to 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. From there, your business might start to be late paying its bills, paying employees or subcontractors, or buying inventory or supplies.
9 Best Practices to Improve Your Invoicing Process
Following best practices for invoicing can help decrease these problems, as well as help improve relationships with customers, and decrease misunderstandings. You will inevitably encounter customers who are late paying you, 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, the longer it will be before you get paid, even if they are generally swift to do so.
Also, send your invoices 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—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. Offer Subscription Pricing
Many professional services firms, including accountants, are moving to an ongoing billing model. With subscription pricing, also known in the accounting profession as value pricing, the firm offers a menu of certain services to clients for a set fee. That fee also includes limits to the services provided, so clients or customers needing more service or attention will need to purchase the menu offering that is right for them.
The benefit of subscription pricing is that clients are then automatically billed, usually monthly, which helps the firm maintain a more balanced cash flow throughout the year.
3. Provide Details
Ambiguous invoicing is bad for 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.
Instead of simply offering a billing line item for “professional services,” or “client meeting,” or “design work,” offer greater detail. An invoice will be more successful if it includes line items such as:
Completed application for permit
Revised designs based on client feedback from 5/21/2020 meeting
Meting with Structural Engineer to review foundation modifications
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.
4. Brand Your Invoices
Your invoices are a reflection of your business just as much as your business cards. In fact, after they become a customer, your contacts may see your invoices more frequently than they do your cards.
Make sure that your invoices not only include all of the pertinent information about what you are billing, but also your:
5. Automate Your Invoicing Process
If you’re using Excel spreadsheets or Microsoft Word to produce your invoices, you’re doing it wrong. Small business software can help keep track of details while you’re performing work for your customers, and can automatically populate invoices with company information as well as standardized product or service descriptions, rates or fees, and other factors.
The best small business software systems also:
Email invoices directly to the client, which is much easier and safer than email attachments.
Keep track of which clients have paid, when, how much, and even 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.
6. Accept Online Payments
“The check is in the mail.” It’s the 21st Century; 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 to interact with each other instantly and pay each other quickly. There are also cost-effective methods for small businesses and firms to accept credit card payments.
Payable departments may also use automated payment systems to schedule vendor payments during certain times of the month or shortly before due dates. The process is 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.
7. 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 also 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 offer 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, which 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 at the start, 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.
8. 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 owed may seem personal, it is important to remain dispassionate about the task. Remaining professional and cordial, particularly if the client is one with which you would like to retain a business relationship, is critical.
In most cases, the customer may have unwittingly overlooked the payment and will remit it promptly after more prodding and reminder phone calls. Be persistent, and you will likely receive your compensation.
9. 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 timely. 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.
Keeping on top of your firm’s accounts receivable is imperative to maintaining the financial health of the practice. These nine tips to improve your invoicing process can help you stay in the black.