It’s no secret that all over the world customers are having issues paying invoices on time. A recent study by Market Invoice revealed that 60% of invoices are paid late across 80 countries surveyed. In the US, that figure is 45.7%. Those 45.7% were paying an average of 7.1 days late, which doesn’t sound like a long time, but to a small or fledgling business it can mean the difference between you paying your invoices on time, and staying in business, or having to shut down. With the trend on the rise, it’s a good idea to use some of the simple tips listed below to get your customers paying on time, every time.
1. Establish the Ground Rules Early
When you take on a new client, be clear about what your payment terms are, and when you expect to be paid by – as well as your usual or preferred procedures for accepting payment. You can spell out the rules of engagement, as they are known, verbally, and include them on the bottom of your invoice, as well as on your website so that customers have different ways to read and review them. State clearly what you expect and make it easy for the customer by giving them all information upfront.
Make sure the customer clearly understands these points (as best you can):
A). How you charge for your services
- Do you take payment by the hour? As a set fee for the project? In which currencies?
- Do you need a deposit to be paid before you get started? How much does it have to be – 10%? 25%?
- If further payments need to be made what are the terms for those? Per month? As certain milestones are reached?
B). What are your payment terms
- Do you accept multiple forms of payment, i.e credit card, PayPal, direct bank deposit?
- How long after the job is complete do you expect payment? A week? A month? Do you have fortnightly repayment terms?
- Do you charge a late payment fee to customers who don’t pay on time? If so, how much as a % of the total quote? Is it a flat rate?
As the business owner it is your job to make this as easy as possible for your customer to understand, and avoid them coming back to you saying ‘I didn’t know about that’.
2. Set Up a Procedure For Collecting Late Payments
Create a map for your invoicing follow up process. This will help invoices move through each step quickly and efficiently, and your staff will know exactly what to do depending on what stage the invoice is at. This also helps you avoid legal trouble if the invoice gets disputed in court, because you have the right paper trail to show the actions you took to collect payment, and took the right steps according to the law:
- Phone call to advise invoice is overdue + Reminder invoice with extension of 7 days
- Second reminder invoice
- Phone call + Past due reminder
- Debt collection letter
- Debt has been moved to external debt collection agency
Make sure you set aside time each week to follow up overdue invoices. Mark this time in your calendar so you are keeping up to date.
3. Do you even need to send an invoice?
If there is an agreement that after a certain period customers will be moved onto an auto-pay system then there may be no legal requirement to send an invoice. If this is part of your service contract then an invoice shouldn’t be necessary, so long as that was the original agreement.
4. Make sure your invoice looks and sounds right
There are a few requirements to keep in mind to produce an enforceable, valid US tax invoice that will stand up in court. The invoice can’t be billing for services or products not provided, can’t be a ‘request for funds’ made to look like an invoice, and has to accurately reflect the amount due – not a higher rate than an original contract was for. For a few more details and requirements, keep reading.
A). Requirements for invoices
In general, whatever a company or customer requests should be included in an invoice you send within the US (other countries will have their own requirements, so you should check with local authorities). As general advice there is no blanket requirement to include your tax ID, but other information and forms might need to be sent in to the tax office each year. You should consult your lawyer or accountant for any detailed invoice preparation advice though.
Detailed information on invoicing for different industries, and forms you might require can be found on the IRS website.
Depending on what services you offer, your client might need to send out a W9 form to you at the end of the tax year. You might also need to receive a 1099 form if you are an independent contractor and have invoiced more than $600 throughout the year to the same customer. Companies generally know they are required to do this though, and make sure they send it.
B). Make sure your invoice is received
Making sure an invoice is received is important for payment on time, so it’s a good habit to get into to confirm customer contact details, and billing address, every time you have contact with them. It’s also possible to state whether invoices should be mailed, or sent electronically, in the contract for service.
Always make sure you have an up to date phone number and/or e-mail address where possible for sending and querying invoices. If there is a specific person you need to speak to about payment, find out their name and contact information.
C). Include the invoice number
Not including an invoice number can make it nearly impossible for the other party to reconcile their accounts, and can mean your payment gets delayed. Make sure that you have a clear numbering or ordering system that’s easy to keep track of on your invoices.
You can do this a couple of ways:
- Sequentially: Numbers according to what order the job was performed, for example 1,2,3,4,5,
- Chronologically: This is a combination of the job number and date, i.e. 20161207-00001 (YYMMDD-JOB NO)
- Project number: This is a combination of the job number and unique projection identifier. I.e. 00001-GreenFields (JOB NO-PROJECT NAME)
D). Present your invoice professionally
Your invoice should be easy to read, and not too busy, with the most important information clearly visible. To make your mark on your customer, you can use the invoice as an extension of your branding and include your logo or tagline too. The most important thing is that the customer understands what they have and what to do about paying it.
5. Make the most of the Recency Effect
We tend to remember things that we looked at, or were reminded about, recently. This is well researched and is known as the Recency Effect. We consider things more urgent when we are freshly reminded about them, and the longer that goes by, the more likely we are to put that thing to the back of our mind.
The Recency Effect is important when it comes to invoices being paid on time. As a general rule it’s a good idea to send the invoice to the customer when the work done is still fresh in their mind. This will be especially effective when they’ve told you that you did a good job. If the invoice gets lost or forgotten, sending reminders pretty regularly should help move things along, because the more the customer gets the less likely they are to avoid payment. Keep your practice with reminders consistent, and your invoice front of mind when it’s late.
6. Tools are available to generate invoices
You can get tools that will create your invoices for you automatically, and these save a lot of time and hassle, because they can automatically include the features you need. At Veromo we are fans of cloud based products, so you can access your information anytime, anywhere. We especially love
Because you’re using a cloud based tool, your finances are all connected this way. As long as you have an internet connection, you can access any of your tools or accounts, and share data with your accountant, lawyer, or other members of your team. Buying and updating software becomes a thing of the past too, because that happens automatically when you pay a monthly subscription fee.
These tools will help you send out estimates, quotes and invoices and display everything on an automated dashboard, showing you at a glance exactly how much remains outstanding and who the debt should be paid by. Taxes are not a big deal anymore either, because most of these tools integrate into accounting software.
If you don’t feel the need for a tool specifically for invoices, you can do pretty much everything a small business owner should need through PayPal which also offers a basic overview of what money has been received and what is outstanding.
7. Chasing payments and getting your money
You’ve worked hard and provided your product or service, so it’s perfectly reasonable to expect fair payment, on time. Don’t shy away from chasing invoices that are overdue. If you do it once, chances are that customers will treat your invoices more seriously from then on.
How you handle overdue accounts and invoices will set the tone for the business relationship and future projects, so you want to be persistent but fair, and not do anything to make it harder than it needs to be. If you state your terms clearly, and show that you are conducting a serious business, customers should respond accordingly. It’s expensive, and time consuming, to take legal action on overdue invoices, so it’s worth trying to avoid it.
If you need to send a final reminder e-mail this might be a good format to follow –
Subject: Invoice Number
Dear (customers name)
I write again regarding the above, which remains outstanding in the amount of $(amount).
This account is past our acceptable trading terms and we are therefore commencing immediate further action.
If payment in full or at least 50% of the amount owing is not paid by [time] [day] [month] [year], the matter will be passed on to a debt recovery service.
Our bank details to make payment into are:
Please make payment urgently before this deadline, to avoid any further debt collection action. I ask that you email me once payment has been made, so I can update your account. This is extremely important.
I appreciate your business and would like to continue to have a good working relationship with you.
Use clear language, and a serious tone, but also include all the information the customer needs to make payment straight away. It’s often the case that your invoice was just lost, or forgotten. Bank details, or a way to take credit card payment, and clearly advising the situation with late fees are important.
Some points to remember
- Send your invoice straight away so it’s fresh in the customer’s mind after you’ve delivered good work
- Stick to your due dates, and send out reminders before too long has passed. Only change this if you’ve both agreed
- Get the contact information of the right person to speak to about invoices and payments, and don’t hesitate to call them and speak directly to them. This can really be the fastest way to clear up any simple issues.
- Keep a respectful tone, and include all necessary information to make payments easy for your customer. Have a productive working relationship where you encourage them to raise any issues early and work through them together
If absolutely necessary, after all else has failed, you may need to consider sending the debt to an external debt collection agency. You should only tell the customer you will do this if you are serious about it, and make sure you follow through if you intend to. Hopefully though, following the process above will mean you don’t need to send many invoices for collection.
Asking for money doesn’t need to be scary, but to help you get on your way we have created a free invoice template to get your first invoice out the door. Receiving payments is the lifeblood of your business, so the sooner you nail your invoicing process the sooner you will reap the benefits of your hard work.
Luscheyne Mellon is co-founder of Veromo, an Australian startup that offers business setup and registration services.
This post is sponsored by Veromo