Are you having trouble with your customers paying on time? You wouldn’t be the only business with this problem. One of the biggest issues for small businesses is getting paid.
Cash flow problems have a flow-on effect that can threaten a business’s survival.
Poor cash flow can mean you are late to pay your own suppliers or utilities, it can mean you have to under-order inventory, it can even mean you are forced to cut back on staff or reduce your own pay cheque.
So how can you fix this?
Let’s look at ways you can improve your invoicing, encourage your customers to pay promptly and make sure you have enough money coming in when you need.
Before you offer credit to your customer, make sure you negotiate your payment terms. Of course, the shorter the term, the quicker the payment will be made. Though, in some instances you will be tied to what is standard for your industry.
What is important is that the customer understands what the terms are and agrees to these terms before you start dealing with them.
But remember, always ensure that the payment terms are on each invoice. And you can go one step farther. Insert the actual due date in addition to the payment terms. This is often more effective than the payment terms alone.
One of my customers changed their payment terms from 30 days to 14 days and notified their customers by email. They stated that given they are a small business the 30-day terms had a large impact.
They expected customers to push back.
To their surprise, customers generally accepted the new terms. Now, while invoices aren’t always paid within 14 days every time, the majority are paid before the 30-day period.
Don’t give your customers any excuses not to pay on time. Payment terms usually state that payment is due within a certain time frame from receiving a correct and complete invoice. Ensure that you have all the information they need to pay on the invoice to prevent delays from reissuing invoices.
Include the following information on every invoice:
• complete detail of the work completed or goods provided
• a purchase number if they have provided one
• the actual due date – for example, if the invoice is issued on 1 September and the payment terms are 14 days, insert the due date as 15 September
• all the available payment options.
Many companies also require details such as business number, registered address, tax status (if registered for goods and services tax the invoice must state ‘tax invoice’) and business contact details, so it doesn’t hurt to add these too.
Ask your customer what information they need on the invoice before you issue it.
The faster you invoice the customer, the earlier they will need to pay to obey the payment terms.
Prepare to issue invoices when each job or sale is completed, delivered or sold – not at the end of the week or month.
That way the payment terms start as early as possible and will ensure that invoices are not missed or overlooked.
Consider emailing your invoices directly to the person responsible for making the payment – the finance area – for faster turnaround time. If you opt for ‘read receipt’ on the email you will know that they have received the invoice.
For higher paying jobs or longer-term projects, consider requesting progress payments.
For example, if you provide a consulting service over a 6 month period, you may consider payment terms such as 30% upfront, 50% on provision of first draft of final report, and 20% on completion of the work.
This will improve your cash flow and reduce the risk of non-payment on projects with a larger dollar value.
For longer-term projects or special order goods or services, you may want to negotiate an upfront payment.
This is standard in certain industries. For example, when you order a new piece of furniture to be specially made, you’re often required to pay a deposit upfront before you fully pay for the furniture when the project is completed.
In cases like this, the deposit might help the business to purchase stock to complete the work without having to draw from its own funds. It also reduces the risk of customers backing out and not paying.
Although many of us don’t like to pay bank charges for things like EFTPOS and credit card processing, investing in the convenience of these services can work out cheaper in the long run.
Electronic banking saves you time chasing payments and running to the bank to deposit cash or cheques. Plus, if you make it easy for the customer to pay by diversifying options, such as adding direct payment into a bank account or credit card payment, they’re likely to pay quicker.
You can influence your customers’ behaviour by implementing procedures on late payments.
You know the saying ‘the squeaky wheel gets the most oil’? Have a system that sends reminders frequently. Most bookkeeping systems can do this automatically, you just need to set it up.
If you don’t chase late payers, your customers may pay someone else before they pay you.
If you have a repeat late payment offender, consider if their business is worth the time, effort and stress you spend chasing payments. It might be more effective to stop doing business with them and use this time and effort to secure new customers that will stick to your payment terms.
Although we tend to focus very much on securing sales in business, it is equally important – if not more – to receive prompt payment. Your business can’t function without good cash flow. A few late payments could be devastating to your business, not to mention your stress levels.
It’s never a bad time to implement these invoicing and the associated procedures into your business. This will up your chances of being paid sooner and improve your business’s cash flow so you don’t fall behind and find yourself making sacrifices.