Small business cash flow depends on prompt payment. We analysed over 12 million invoices to discover some revelations about getting paid on time. We also asked the small business community for their tips and tricks.
Invoicing tips from other small businesses
Just about every small business struggles with invoicing. A study of our users found that:
· about 60% of invoices are paid late
· more than a third are at least 2 weeks late
It doesn’t matter where in the world we run this study – or who among our 860,000 small business subscribers we ask – the results are essentially the same. Small businesses have a hard time getting paid.
However, things are changing. Business owners are taking clever steps to improve their invoicing process and get paid quicker. We asked 1,500 business owners for their tips and tricks – and looked at changing habits among Xero users – to bring you advice on invoice payment terms and best practices.
You have more control than you think
If a client doesn’t want to pay on time, it’s hard to make them. For that reason, many business owners feel powerless to improve the speed of payment. However, if you focus on the things you can control, there’s still a lot you can do to get paid faster.
Your invoice payment terms can set the tone for the whole transaction. But you can also improve your chances of prompt payment by invoicing quickly, communicating clearly and reminding clients when they owe you.
Invoice payment terms
Invoice payment terms spell out how you expect to be paid, and might include details like:
· accepted forms of payment (maybe you won’t take credit cards)
· the currency you deal in, if you work across borders
· late-payment penalties, if you charge them
But perhaps the most important payment term of all is the due date. When do you expect to be paid? Businesses used to always give 30 days but this is changing.
Long payment terms are an old-school hangover from the days of snail mail and payment by cheque. But now that businesses send online invoices and most payment is electronic, 30-day terms are obsolete.
If you're serious about the work you do, and you hustle to meet your clients' deadlines, there's no reason why you shouldn’t be paid within a week.
Short payment terms are common
You needn’t feel bad about giving shorter invoice payment terms. Most small businesses do it now and expectations are changing. Our study found that:
· between 70 and 80 percent of businesses give 2 weeks or less
· more than half of those request payment within 7 days
Get clients on the clock quickly
It doesn’t matter how short your invoice payment terms are if you don’t send the bill on time. Whether you give 30 days to pay, or just seven – the clock doesn’t start ticking until the invoice is out the door.
Invoicing can be a pain. Other commitments and interruptions get in the way. As a result, most businesses only send invoices once every 2-4 weeks. But when you delay, you’re essentially pushing back your payday.
Try to use templates that speed up invoicing. Then you can pull up a fresh invoice, punch in the job details and costs, and send the bill quickly. A lot of software packages can do this. Some allow you to do it from your smartphone, so you can send invoices when you’re out of the office.
Don’t wait until an invoice is two weeks late before reminding a client they owe you. Try sending a friendly email as the due date approaches. Follow up again if they go past due.
If clients don’t respond to emails, pick up the phone. Don't let it drift. It may not be the funnest part of being in business – but it could help you stay in business.
If you don’t have time for all the follow-up, consider:
· using invoicing software that automatically sends reminder emails for you
· asking your accountant if they’ll call overdue clients for you
Top seven tips to get paid faster
Getting paid and having a healthy cash flow is the lifeblood of every small business, but it’s not always as easy as sending an invoice. The 1,500 businesses that spoke to us about invoicing offered these practical tips:
1. Discuss payment terms before you get started Getting this sorted upfront means that there’s no confusion down the track. It also sets the client's expectations around payment before you start the work.
2. Keep detailed records of inventory and time Don’t work out your costs at invoicing time, as that will just slow you down. Keep a running record, so the numbers are at your fingertips when you need them. You’ll also be less likely to miss something this way. And if costs are going over budget, you can let your client know, instead of sending them an expensive surprise at the end of the month.
3. Make the invoice clear and easy to understand List the details of the job in a way that makes sense to the client – any confusion could create a payment lag. It’s also good to personalise your invoice with your business logo – it helps carry on the professionalism of your work.
4. Address the invoice to the person paying Make sure your invoice goes straight to the person who makes payment to avoid getting lost in someone else’s inbox. That will probably be different from the person who ordered the work,. If you’re unsure exactly who’s in charge of accounts, give them a call – it pays to know the person paying the bills.
5. Invoice as soon as possible Send your invoice as soon as possible, the sooner a client receives an invoice the sooner they will make payment. It also means they will receive it when the value of your work is still fresh in their mind. Accounting software that lets you create professional recurring invoices will streamline the invoicing process.
6. Keep talking to your debtors The squeaky wheel gets the oil. When things become overdue send reminders, monthly statements or make a phone call. It will help remind your client that you are serious about getting the invoice paid. Some accounting software sends you an update when the invoice has been opened.
7. Add 'overdue' fees If you've set your payment terms out clearly on your invoice and the client has ignored them, you’re entitled to charge interest in the form of overdue fees. Be prepared for robust feedback from your clients if you go down this route, and consider reversing the charge once the lesson has been learned.
Creating an invoicing system that works
You may have made your first invoices in a standard software package like Microsoft Word. Maybe you even had to search the internet for tips on how to create an invoice.
As you grow, however, a business’s invoicing needs become more complex. Think about how you can create a system that incorporates these tips, speeds up invoicing, and improves cash flow into your business.
Invoicing software can help. As a bonus, it generally comes as part of an accounting package, which means your books are automatically updated as invoices are issued and paid.
What startups should know about invoicing
Hindsight is a wonderful thing. Most people don't know a great deal about invoicing when they start their first business, so it's good to learn from people who have already been there.
Businesses we spoke to said they initially underestimated how much time invoicing would take up. You can spend up to 10 percent of your work time creating, sending and chasing invoices. That can cause a drag on your other administration work, so be sure to factor this into your planning and accounting strategies – and set up the most time-efficient systems you can.
If you sell big-ticket items or expensive services, consider offering clients split payments. All businesses have to manage their cash flow and your clients are no different. Partial payments can make account reconciliation a little trickier for you, but it makes it easier for people to spend money with you – which is a good thing. Just make sure clients quote the correct invoice numbers on every payment they make.
Adjust invoice payment terms and look at your whole system
Being a small business owner often means you’re short on time, but it’s worth making the effort to get your invoicing set up properly. Having a process that helps streamline invoicing can drastically reduce the amount of time you spend collecting your hard-earned money. And that’s got to be great for your business.