Tracking down payments from late customers seems to be a month-end ritual for almost every small business owner. Collecting from these customers can be awkward, not to mention time and energy intensive. Meanwhile, the effect of delayed payments on the business can be profound in terms of disrupted cash flow.
But why wait until an invoice is past due before taking any action? Instead, save yourself the trouble by being more proactive in your debt collection strategy. This will not only help you maintain positive cash flow, but it will also keep your business relationships strong.
We have put together 10 practices that entrepreneurs can implement to collect money they are owed faster.
1. Review your existing billing cycle
By simply changing your billing cycle, you can accelerate cash flow and get better at tracking late payers. If you have a monthly billing cycle, consider adopting a more frequent billing cycle, such as twice a month or even once weekly.
You can also invoice customers early in the month. Since most companies do a once-monthly check run, if your invoice happens to miss that monthly run, you will otherwise end up waiting for another month to get paid.
2. Create better invoices
Sending unclear or incomplete invoices can hurt your business and delay payment. Pay close attention to your invoice design and ensure that they contain sufficient detail yet are simple and clear.
Your itemized invoice should contain the issue date, net terms, due date or “upon receipt” and instructions for paying offline, such as by check (including to whom it should be written and where it should be sent), as well as instructions for paying online.
And last but not least, make sure your invoices are sent promptly!
3. Discuss your terms with the buyer beforehand
It is best to establish your terms and present them to customers at the time of sale. This might seem a little inconvenient or even uncomfortable, but remember it is a step toward keeping your cash flow going.
4. Run a credit check on the customer
As they say, prevention is better than cure. It is a good practice to check the credit history and score of your potential customer and minimize the risk of delayed or unpaid invoices.
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5. Offer early payment and prepayment discounts
To ensure getting paid on time and in full, consider offering discounts. For example, you could extend a discount of 2% to 5% for paying in advance. By incentivizing customers, you will get paid faster and save yourself the hassle of trying to collect payment later.
6. Set a penalty for late payment
Some companies secure prompter payments simply by mentioning a penalty for late payments on their invoice. Before you add this penalty clause to your invoice, make sure that you have a clear policy explaining that a fee will be levied on payments made after the due date.
Though you may not actually charge the fee and may even waive it for loyal customers who run behind on their payments for good reasons, simply having a late payment penalty rule will speed up collections.
7. Mandate deposits, down payments, progress payments
Consider asking customers to make an upfront payment, which is a standard practice in many industries. Request full or additional payments along the way as results are delivered.
8. Set up reminders
Don’t try to coordinate with customers after the due date. Instead, establish a follow-up schedule.
Outline a plan for periodic follow-ups through letters, emails or phone calls where you remind the customer to make payment within the specified time frame.
9. Take a personal approach to overdue payments
When payment is slow coming in, take a more personal approach toward following up with customers. This could provide you with valuable insight on the root cause of late payments – including issues with your customer service or even problems with your products.
10. Seek professional help
Sometimes using a professional service to help manage receivables is a good idea, especially if you are unable to accelerate your cash flow despite your best efforts. Otherwise, it is likely to become a serious collection problem that could cripple your business.
Keep in mind that you can opt for outsourcing account receivable services designed specifically for small- and mid-sized businesses, to manage your cash flow more effectively.
Escalon provides startups and small to midsized businesses with accounting, strategic finance, CFO services, taxes and support. Talk to an expert today.
