Want Your Outstanding Invoices Paid?
Procedures to Help Encourage Payment
If you are a business that provides services, chances are you invoice your customers/clients for said services. Further, if you are regularly invoicing for your services, it is also likely that you have several outstanding invoices at any given time. In accounting speak this is called Accounts Receivable, which is simply the balance of invoices that have not been paid yet. Having a large accounts receivable balance means you have a lot of money that is due to you.
A common problem that we hear about from our service provider clients is that they are having trouble encouraging payment of their open invoices. They send their invoices after work is completed, and sometimes those invoices sit open for quite a long time. Even when reminders are sent, payment still isn’t made in a timely fashion in some cases.
Obviously, this is a big cash flow problem for business owners. This is your livelihood and getting paid on time helps you pay your bills, too! We want to share some tips that can help you encourage timely payment of your open invoices. Let’s help you get paid!
HAVE A CLEAR PAYMENT POLICY
Clear communication is always important. Can you think of a life situation where it is not? Think about parenting. Some of the most effective parents are master communicators. They tell their children exactly what they expect of them and even more important, why it is expected of them. Now we aren’t saying your clients are like children, we’re just stressing the importance of being clear up front.
Take the time to develop payment procedure guidelines that you can give to every client before working with them. It can be part of your initial contract or engagement letter. An example of this might include the following:
How you will invoice them - for example they will receive an email with a link
The payment platform you will use – this could include QuickBooks Online, PayPal, or Stripe
Payment options they will have like credit card or bank transfer
When the invoices will typically be sent – for example first of the month, or after completion of a certain milestone
When payment is expected from them – this could be 15 days after invoice is sent or due on receipt
Your late fee policy – will you apply late fees after a certain number of days that the invoice is past due? What is the late fee amount? Is it a percentage or a flat rate? (More on this later.)
Now that you have outlined the details of your payment policy, you may want to add something about the “why”. This could just be a short sentence about how you really appreciate timely payment in order to keep your business operations running smoothly (aka pay your bills).
Or it could be something about how, in order to stick to your timeline, you need timely payment. Put this in your own words of course, but it doesn’t hurt to remind your clients that you are a small business just trying to keep things moving efficiently and it really helps you when they pay on time.
In several industries, it is common that clients will want to initiate payment using their platform or their policies. It is not always possible to avoid this if you want to work with them, and this is common with larger corporations. You will have to feel this out, but as much as possible try to stress that you have a set policy for working with you and you would like to follow your payment guidelines. Explain that it helps you streamline your processes!
LATE FEES
This one is a little touchy for many small business owners. It may not feel comfortable for you to apply late fees to your clients’ invoices. Or it may feel like the best thing you ever did to encourage clients to pay on time. It really depends on your situation.
Many clients we have worked with complain that so many of their clients don’t pay on time that it becomes very difficult for them to manage their business. If this is your situation, being clear about your late fee policy up front and then applying late fees when invoices become past due could be a very effective way of motivating clients to pay on time. More times than not, clients will not even incur these fees. If the policy is clear, they will pay on time in order to avoid any fees.
There are many options for applying fees so you can choose the structure that feels most comfortable for you. You can choose how many days must pass before the fee is applied, and you can choose whether your fee is a percentage of the total invoice or whether it is just a flat fee.
If you are using QuickBooks Online you can customize your late fees to be applied automatically to your invoices on a certain date. You can even customize your late fees by client/customer. Access to this feature depends on your account and the version you use, but if you have access to it, it can really make the setup easy!
REMINDERS
Who doesn’t need reminders these days? We are so inundated by information, emails, social media, etc. on a daily basis! Reminding your clients to pay your invoices can be a very easy thing to put in place to encourage payment.
Think about what feels comfortable to you as to when you send the reminders and how many you send. You may want to send a reminder a couple days before the invoice is due. Or you can wait until it becomes past due and then send a reminder a certain amount of days after it is due. You can also send additional reminders if more time passes after the first reminder is sent and the invoice is still not paid.
If you are using QuickBooks Online for your invoicing, there is a section under Account and Settings and then under the Sales tab to set up automatic reminders. You have the option to set up one, two, or even three reminders to go out automatically on certain dates.
REPORTS
If you are still having trouble with payment after putting the above items in place, there are some helpful reports you can run that allow you to see what amounts are overdue and who you will need to contact to see about getting those amounts paid.
Common reports to look at include:
Accounts Receivable Aging Detail – This one shows a listing of invoices by past due categories (for example 31-60 days or 61-90 days). This report is helpful in that it shows you how old your invoices are and how many there are in each category.
Accounts Receivable Aging Summary – This is a summary of the information above and you can sort it in different ways. We like to see this report by client to see how much is outstanding in each aging category for each client.
Collections Report - This may be our favorite one. This shows the actual invoices that are overdue for each client. There is information on the date, invoice number, when it was due, how overdue it is, and the amount. This one is probably best for contacting clients but they are all helpful in different ways. Choose the one you like best or use them all together.
These are the specific names of the reports within QuickBooks Online, but you may be able to find these reports in other bookkeeping software. Click on the links above to access videos walking you through each report in QBO.
We hope that these tips will be helpful in encouraging payment from your clients. It can be very stressful when you have completed a large project and are not seeing payment for that hard work. With some clear policies and procedures, hopefully, you can reduce or eliminate those late payers. Need more guidance? Reach out for an hourly support session and we can help you get some of these policies in place.