Reducing aged receivables

Waiting for an invoice to be paid after the due date has passed can put tremendous strain on the cash flow of the business. The issue of aged receivables affects businesses of all sizes, from self-employed sole traders all the way up to large enterprises. If late invoices become ‘normal’ for the business, it’s harder to grow and invest back in the business.

In this guide we’ll talk about aged receivables in more detail and what you can do to reduce and even eliminate this problem from your business. If you are currently battling with this issue and feel you’d benefit from some specialised assistance to fix this, get in touch with our team and we’ll arrange an initial chat to find out how we can best help you.

Have a good accounting system in place

The basis of maintaining good cash flow through timely invoice payments is by taking the manual load off you or someone in your business and onto a good accounting system. Platforms like Xero do so many functions that take considerable time to process manually that it will free up businesses to do other things. Xero and systems like it have features around aged receivables, such as automated reminders at preset time periods after the due date (more on this later).

These systems also automatically provide you with a ‘dashboard’ style view of total overdue invoices, total invoices outstanding and other key information about the receivables of the business. If you use Xero-type systems to track your bill payments as well, you’ll be able to get data around outgoings vs. incoming payments.

The data available from accounting software is great for learning which clients are the most valuable to your business - sometimes it's not the biggest invoices but the quickest payers who help keep the business running. The time taken chasing late invoices represents valuable time that could be used to generate more revenue - so make sure you pay attention to this information available from accounting software. In Xero, take a look at the ‘Aged Receivables’ report and set the date for the last 12 months. You’ll see the amount of revenue you’ve had to chase beyond the due date and which customers have done this the most.

Confirm your payment terms clearly and early with new customers

Within your terms of engagement, you should have a clear indication of the time that invoices will be sent. If you intend to invoice for services provided within a calendar month, make sure you send the invoice at the very end of the month or at the very start of the following month. Each client you have might have their own specific terms which can be worked through negotiation before you start providing services.

In accounting software such as Xero, you can set up invoice templates that can also reflect your terms. ALWAYS ensure your templates include all the information on how to pay the invoice – bank account number for direct credit or payment gateway links. You want to make it as easy as possible to pay you!

Some businesses have a certain date where their own customers pay, meaning they’re in a better position to pay your bill after this date. Be realistic and flexible here, provided they commit to that due date. It can sometimes be a cashflow advantage to have customers that pay you across different times of the month.

Ensure you’re timely with sending invoices out

Being punctual with invoices isn’t just a responsibility of your customers with paying - it’s on the business to ensure that you send these in a way that’s consistently on time with your payment terms. When businesses fail to send invoices for weeks after the month the work was provided, this can subconsciously send the message to debtors that the terms around payment are loose as well.

There’s another reason why you should be timely. Let’s take the typical due date of the 20th of the following month the services were provided. If that’s the case (like it is for many businesses), then it’s a matter of consideration for your clients that they have ample time between receipt of the invoice and payment. Whatever the due date you set on your invoice - be realistic about how much time you’re actually giving them to pay.

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Crafting reminder emails

Reminder emails can be automatically sent out by certain accounting platforms like Xero, or you can tailor these and write them yourself directly in your email platform. It’s not in our work culture in New Zealand to find this area particularly easy; we’d ideally want to keep our customer relationships friendly and positive. But if we fail to prompt clients on overdue accounts, it’s our own businesses that suffer.

The art of reminder emails is to keep them friendly, positive, and brief. What some businesses opt for are friendlier emails within the first month of overdue accounts, and only if needed move to a more direct tone if the customer shows no signs of paying it soon.

Having automated reminders is great because you can craft different messages for different periods of time elapsed after the due date. In our opinion you want to keep all of these reasonably friendly - very late invoices will usually need more customised relationship management via phone and email.

Often you’ll find these reminders are enough to prompt payment - most debtors aren’t actively trying to evade payment of your bill, and there are plenty of legitimate reasons why the due date might be missed inadvertently - illness, a business change that caused admin headaches at their end, or even the due date falling on a weekend and being missed. Of course, it’s the responsibility of customers to pay on time, but make sure the response to this isn’t unnecessarily harsh.

So, to craft basic reminder emails ensure the following information is included:

  • The invoice number in question.
  • The amount the invoice is for.
  • The due date of that invoice.
  • A gentle inquiry on whether this is still front of mind to be paid (e.g “just making sure this one is still on your radar”).
  • Invitation to provide an explanation without being combative (e.g. ‘Let me know if there were any issues with payment on this one and I can make a note on my end on when we should expect payment).
  • Some other non-invoice payment relationship comms (e.g. hope the team is managing to stay dry in this weather) - this makes sure the customer doesn’t feel like it’s straight debt collection.
  • Reiterate the payment options (bank account and reference or any other method you allow).

Often this type of email will be enough to resolve the issue and get payment - or at least uncover any problems there might be.

Knowing when a phone call is needed

Your clients are central to keeping your business running. Making sure customer relationships are as good as possible is smart operating practice. When an invoice has been overdue for a considerable period (many weeks, not days), then you may start to feel quite frustrated with that client.

It’s in these moments where emails can be a bad idea - the medium of email when the matter at hand is a difficult one can lose much of the subtle humanity of an in-person or phone conversation. This can leave customers feeling backed into a corner or that your email tone is rude.

Instead, pick up the phone - use the issue to provide some relationship maintenance and ensure there isn’t anything else going on that might be resulting in your not being paid. On a phone call both sides are typically friendlier as the tone of voice can help deliver tricky messages more tactfully. You may discover a detail that helps to understand the reason for the late payment, and even may be an opportunity to strengthen the relationship by making a change to how you deliver services or set the due date. Not all customers will proactively raise these things with you otherwise, so a candid conversation is highly recommended.

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Escalation points

If you still don’t get progress from phone calls, it’s important to know who else you can speak with. If you’ve been dealing with an accounts person or your regular non-owner contact at the customer’s side, it might be time to enquire with the business owner or a more senior person in the business about the issue.

Obviously going beyond your usual contact might have some impact on your working relationship with your everyday contact on the customer’s side, but if you’re experiencing dramatically late invoices with no success in following up it may be the right option.

Building in late fees to your terms

Something that businesses can do to dissuade customers from outstanding invoices is by including a mechanism for late payment penalties. This might be a combination of your own % of the invoice added on after a certain amount of time and collection through a 3rd party. If these are outlined in your terms of engagement, you use your discretion around applying them or not. Again, this can be a step that affects the relationship so they really should only be there as a last resort.

Be a fast payer yourself

As a general rule, act in the way you want to be treated yourself. In business, this means keeping your word and paying invoices for goods and services by the due date. As much as possible, try to not have your operating costs rely upon the payment by historically slow customers. Keep your aged payables as close to zero as you can. This is even more important if you provide two-way services with customers - in other words, customers who invoice you as well as you invoicing them.

The benefits of a broad client list on cash flow

Aged receivables can be even more of a threat to cash flow when you only have a handful of clients. By diversifying your client base across more individual businesses, you reduce the risk and impact of late payers. This is also a good way to protect the business against customers suddenly stopping their engagement with you.


Further reading on the topic

Here are some other useful resources from around the web:

The above information is general and does not represent tailored advice to your business. For more specific guidance, get in touch with our team who can connect you with one of our bookkeeping experts.

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