Late payments aren’t just frustrating for a small business, they can seriously disrupt cash flow. To ensure prompt payment, follow these invoicing and collections tips:
1. Get it in writing
Having a signed agreement from your client that specifies invoicing terms and pricing will prevent future complications, says Mari Ann Snow, owner of small business consulting firm Sophaya. Determine the client’s billing schedule in advance and find out what information it needs for processing. Will the client need a purchase order or will an invoice number suffice? Does it need to set up your business as an approved vendor?
2. Invoice promptly
No matter how packed your to-do list, submit invoices immediately after or as you supply products and services. The sooner you invoice, the sooner you’ll get paid. Before you submit the first invoice to a new client, learn its processing system. If you know that the business only issues payments twice a month, you can be sure to invoice well before those dates.
3. Consider early payment discounts
If your business can’t wait 30 days for payment, offer a one- to two-percent early payment discount. Because this option costs you money, only extend the discount when you really need the funds; for example, for a major equipment purchase or during a slow period. Be wary, however, of clients that take the discount and still wait to pay. “If you know the client is reputable and pays on time, a discount may benefit your business,” says Steven Friedman, senior vice
president, business and advisory brokerage, for Reichel Realty & Investments, Inc. in Palm Beach Gardens, Florida.
4. Adopt a late fee policy
Include your late fee policy in client contracts and on invoices. “Clients will understand that they need to pay the invoice on time or they’ll get hit with late fees,” says Friedman. Whether you charge two percent per month or 18 percent annually, enforce the policy consistently. “It’s easier to reverse a late fee than it is to collect fees later on,” Friedman says.
5. Accept online payments
In our increasingly paperless, cashless society, more small businesses choose to make and receive payments online. Most banks and some financial software services allow customers to receive Automated Clearing House (ACH) and credit card payments. The online option means faster payment for you and an easy process for the client. Many software solutions also let you send and track invoices, which helps you manage receivables more efficiently.
6. Follow up
Friedman tells businesses to check in with clients at least two weeks before an invoice due date. That way, you can correct any problems or resend the invoice if they didn’t receive it. Soon after the due date, follow up with a polite inquiry. “If the client knows you’re going to call, they will put you on the top of the list,” says Friedman.
An efficient receivables process is a key component to maintaining positive cash flow. With friendly communication and an organized invoicing policy, you’ll spend less time chasing down the money and more time making it.
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