Businesses in several industries use invoicing to get paid. If your invoicing process is weak, you may face negative cash flow in the business. Your business runs on cash; if you don’t have enough of it, you might not be able to pay your employees, vendors, creditors, etc. A poor cash flow can have a huge, negative impact on your operations. Thus, here comes the need to learn effective invoicing strategies to improve cash flow.
But before that, let’s discuss the risks associated with overdue invoices. One of the most significant challenges businesses face these days is getting the outstanding invoices paid.
- 93% of companies surveyed had not received payments on time from domestic B2B partners, according to a recent survey by Atradius.
- According to one global study by Intuit QuickBooks, around 31% of small business owners who participated say they have to wait more than 30 days to get paid.
- A U.S. Bank study revealed that 82% of businesses that failed found cash flow problems a contributing factor behind their failure. Source
How Can Late Payments Affect Your Cash Flow?
Late payments can drain your resources; you are paying your accountants to get the payments cleared, and they are also spending time collecting money instead of carrying out accounting chores. SMEs often struggle the most because they usually do not have a specific team to chase pending invoices. Late payment can affect your business expenditure as you also have payments to make, for instance, rent, payroll, operating costs, power bills, etc.
How Does Ineffective Invoicing Have an Impact on Your Cash Flow?
Three most common invoicing problems that can affect your cash flow:
1) Invoicing Errors: If you send an invoice that carries incorrect information, the receiver/payer will most likely refuse to process it. In such instances, the client calls you and requests to send a new invoice. Consequently, your accountants will look into the case, make changes to the invoice, and send it again. Then, the client will also take some time to process the payment; all that delays the entire process.
2) Delay in Sending Invoices: You should ideally send invoices as soon as the service or product is delivered. If you take too much time to send invoices, your clients might forget about the purchases, it will no more be in their minds, and as a result, they will most probably ignore the invoice.
3) Accepting Late Payments: If your clients know you will accept late payments, they will pay you late. For example, if one invoice has a hefty late fee, and another does not have any late payment consequences, clients will keep the latter one to be paid at last. If you are also allowing your clients to pay you late with no late fee, you are likely not to get payments on time.
For businesses looking for ways to manage cash flow more efficiently, here are some valuable tips to get your invoices paid on time:
1) Set Clear Payment Terms: Invoice payment terms help you get paid on terms that you and your clients have mutually agreed to. This enables you to have better control over cash flow as the terms clearly set by you will make customers know when and how to process invoices.
2) Consider Taking Up-front Payment: If you ask for up-front payment (ideally in a service-based deal) from clients, you can get rid of the anxiety concerning working for a client who you think may not pay you once the project gets completed. You need not deal in this way with each client, but with some clients who have a history of processing invoices late.
3) Send Payment Reminders: It is common for clients to forget to pay an invoice; thus, sending them reminder emails can be a good idea. However, you may also get an automated invoicing system in place that can send reminders to clients when the due date is approaching, for instance, a week before the set due date.
4) Offer Incentives on Early Payment: If your clients are ready to pay you in advance or at the time of service, consider offering them a small discount. This is effective in encouraging good payment habits and can lead to a healthy business-client relationship.
5) Offer Easy Payment Options: Making it easier for your clients to process your invoices can help you get paid on time. The best you can do here is add a link to a payment gateway program in the invoice, clicking which the client can make the payments online using debit/credit card, net banking, or other options. The easier it is, the quicker you get paid, helping you safeguard your cash flow.
6) Monitor Clients’ Payment Behavior: If you or your team notices something unusual, you should investigate to find the problem. Check your clients’ payment behavior (do they make payments on time? Do they make full or partial payments? etc.) regularly to minimize the risk of late payments.
Additionally, your sales team can also improve the sales pitch (getting the clients clear on payment terms) to not waste time on prospects that may later become bad debts.
7) Levy Penalties on Late Payment: A strict late payments policy can be helpful in maintaining a healthy cash flow. Levying a firm late payment fee will ensure your clients pay you within the due date to avoid additional charges in the form of fines/penalties.
8) Consider Outsourcing an All-in-one Solution: You may consider outsourcing invoicing services or debt collection jobs to a third-party service provider. This way, you can get a peace of mind that your invoices are reaching your clients promptly and you are getting paid on time. This will also help you maintain your trading relationships with clients.
9) Always Keep Important Receipts and Other Paperwork: If you have a receipt or proof that the goods you sold and shipped are accepted and received, there is no reason for late or no payment. Keep emails, delivery proof, receipts, etc., because when invoices become overdue and if a dispute is raised, you will have the paperwork you can use as a piece of evidence.
Positive cash flow is vital for your business’s smooth running, especially in months when the cash is tight or at times of a crisis. Getting payments late can lead to situations where you might have no other option than to use your cash reserves to pay overhead costs instead of investing the same in business growth. Therefore, follow the tips shared above and ensure you get paid on time to maintain an optimal cash flow.
Author Bio: Stacey Howard has 6 years of experience in accounting & bookkeeping. She has been working as an accountant with reputable firm Cogneesol– accounting and bookkeeping services provider. Due to her passion, she has contributed significantly through her write-ups about multiple accounting industries.