Get Paid On Time. The Easy Way to Collect Your Invoices

Small businesses are not good at collecting their invoices.

This flaw is one of the main reasons that small businesses encounter cash flow problems so often.

While this collections problem affects companies in most industries, it’s prevalent in creative and technical companies – such as advertising agencies, marketing firms, consulting companies, and technology firms.

When it comes to delivering their products and services, business owners deploy laser-like focus to ensure customers are satisfied.

However, they often fall short when it comes to getting paid.

They regard invoicing and collections as a back-end process. It’s boring, time consuming, and few people enjoy doing it. Lastly, collections has a bad reputation.

But collections is also how your company gets paid. Without it, you’d be out of the game.

As a result, it’s second in importance only to delivering quality solutions to your clients.

Easy, Friendly, and Effective Collections

There is a way to handle collections easily for both your company and your clients. It doesn’t require playing hardball or pestering clients.

Following this method will give you better cash flow and better-paying clients.

Lastly, you will probably spend less time worrying about collections and more time working on client projects.

Step #1: Read the contract

Many collections problems between small businesses and large companies occur simply because the small business owner did not read the contract.

Large companies often use boilerplate contracts that outline the payment terms in detail. The contracts outline how much time the client has to pay an invoice – often 30 to 60 days.

Contracts also describe the process to get paid – such as how to submit the invoice, whom to send it to, and so on.

Not adhering to your contract terms results in delays. Read the contract and understand every part of it.

This advice may sound obvious, but few small business owners actually follow it.

Step #2: Check business credit

If a client requests net 30 days payment terms, check their business credit before agreeing to these terms.

A commercial credit report allows you to determine if a prospective client is a good payer. Obviously, provide credit only to clients who have reasonable credit. Other clients should pay upfront.

A few vendors provide commercial credit reports.

The most well-known are Dun & Bradstreet, Experian Commercial, and Cortera. Reports vary in price and level of detail.

Use simple reports for small projects. Use more extensive reports, and reports from more than one provider, for larger projects.

Step #3: Use a letter of acceptance

One of the simplest and most effective ways to minimize invoicing problems is to use a project acceptance letter.

The letter is fairly simple and outlines the deliverables for the project. It also states that everything has been delivered according to the requirements.

Ask the client to sign this letter once the project is completed.

A letter of acceptance often effectively roots out potential payment problems ahead of time.

Sometimes, clients are not satisfied with the work but don’t tell you. Instead, you find out about it when they refuse to pay an invoice.

Using an acceptance letter brings up any possible complaints immediately. If your client is not satisfied with the work, they will refuse to sign the letter and let you know about the problem.

This strategy gives you a chance to fix the problem on the spot.

Have your attorney create an acceptance letter for you. Be mindful that the client may refuse to sign a letter that has onerous legal terms.

A simple statement saying that they have reviewed the work and that it looks acceptable should be good enough.

Step #4: Follow their rules

Read the payments section of the contract and submit invoices following your client’s rules. If they require you to send an invoice to Accounts Payable, with a copy to the project manager – do so.

Most payment delays are simply due to not following simple rules.

By the way, include a copy of the acceptance letter we discussed in Step #3 when you submit your invoice.

This simple trick can go a long way toward eliminating payment problems.

Step #5: Monitor invoices regularly

Use an invoice aging report to monitor the status of your invoices regularly. This report comes standard with most accounting packages, such as QuickBooks®. If you don’t use an accounting package, you can create an aging report using Excel®.

An invoice aging report lists and categorizes all your invoices.

Usually, the categories are “Current,” “1 – 30,” “31 – 60,” and “Past 90.” “Current” invoices are usually ok. Invoices categorized as “1 – 30” are considered to be 1 to 30 days beyond terms (i.e., late). Likewise, invoices in the “31 – 60” and “Past 90” categories are late by those many days.

This report gives you a “lay of the land,” from a collections perspective. It lets you know which invoices are current, which are late, and which are in default. Use this report to map out the collections strategy.

Step #6: Friendly reminders

Using the invoice aging report, determine which clients need a payment reminder.

Send the client a friendly reminder once the invoice is past 10 days. Send another reminder if the invoice is past 30 days.

For invoices past 30 days, call the client to determine if there is a problem.

All reminders should be written in polite, professional language.

Step #7: How to handle disputes

If your client does not pay due to a dispute, review the situation immediately.

If they have a bona fide dispute, fix the problem immediately – even if they have signed an acceptance letter.

Keeping your client happy and your reputation intact is critical for long-term success.

However, some clients may create a dispute in order to get additional “out-of-spec” work done for free.

They are essentially holding a payment for ransom as a way get more work out of your company. In these cases, show them the signed acceptance letter.

This approach reminds them that they acknowledged that the project was delivered to their satisfaction.

Step #8: How to handle defaults

If you checked your client’s commercial credit diligently (step #2), there is little chance that they will default on a payment. However, it can happen.

If the default is due to a temporary cash flow problem, work out a payment plan with them.

If the default is due to something more serious (e.g., bankruptcy), you need to work with an attorney.

Step #9: Handling cash flow problems

There are times when you may follow these steps and still experience cash flow problems. In this case, work with a financial professional to help diagnose your cash flow problem.

Chances are that the main issue is that you simply cannot afford to wait 30 days to get paid.

This problem is common for small and growing companies. You can often manage this problem by factoring your invoices.

One last point

Always be professional and polite in all client interactions.

Using aggressive collections tactics coupled with harsh language seldom works.

Actually, it’s often counterproductive and sets you back.


Editorial Team

The Wavegen editorial team publishes content daily. To get in touch please use the contact page.

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