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The success of any business, especially small businesses and start-ups, often hinges on having a consistent cash flow. Ignore your cash flow, or let it sit on the back burner for too long, and your entire business could go up in smoke.
Believe it or not, there are things you can do before you get to the invoicing stage that can vastly improve the chances of getting paid on time. These include:
When starting out on a costly project or just getting started with a new client ask for a deposit upfront. Getting a deposit upfront for 25% – 50% of the project, or having your client pay for a certain number of hours in advance is a great way to level the playing field. They get some skin in the game and feel committed to seeing the project through, and you get the peace of mind that you won’t be working for free.
Always, always, always have a written agreement that both you and your client read and sign. This agreement should detail the scope of the work being completed, the cost of the service, when payment is due, and how payment can be made. This ensures you have something to refer back to if any questions or concerns arise.
Draft a Payment Policy that you can send to your clients as part of your welcome package. Your Payment Policy should reiterate what the payment terms are and how payment can be made but should also include what will happen if payment is not received in a timely manner; including any potential interruptions in service or late fees that may be applied.
You may have heard that 30 days is the standard minimum payment term, and that is a term many businesses default to; however, you can set your payment terms for any length you desire. Try instituting a shorter payment term such as “due within 14 days” or “due within 21 days”. A shorter the payment term helps to create a sense of urgency and helps make sure your invoice ends up in the ‘today’ pile rather than the ‘later’ pile.
Some clients may require the invoice to contain certain information such as TaxID or a purchase order number. Others may ask that invoices be directed to a specific person or department in their organization. Make sure you ask your clients what their invoicing needs are as part of your onboarding process. Making sure your invoice contains everything they need and is directed to the appropriate person will help ensure you get paid on time.
When working on a large project for a client break the project down into stages and make sure to invoice as promptly as possible upon completing each stage. If working on an on-going basis set up a consistent billing cycle such as weekly or bi-weekly. In the first instance, you want to make sure your client receives your invoice while the work you completed for them is fresh in their mind and invoicing in stages keeps the amounts manageable for your client. Putting them on a billing cycle and keeping it consistent does the same thing and also helps to establish a routine whereby your client gets used to paying you. If working on a project, try sending the invoice along with the final update that announces that phase to be complete. This decreases the likelihood of the email being ‘missed’.
Saying “Please” and “Thank you” on your invoice is not only polite but, according to Freshbooks, it actually increases the likelihood of an invoice getting paid by more than 5%.
That same report from Freshbooks also pointed to a correlation between using the term ‘days’ rather than ‘net’ and speedier payments. They speculated that the term ‘net’ may not be “as clear to less business-savvy clients.” In their report, they advise using precise terms such as ’21 days’ rather than ‘net 30’ actually leads to faster payment than asking for immediate payment would.
One great way to promote prompt payment is to charge a late fee. Once again we create a sense of urgency by letting your client know that a late fee will be charged on all overdue invoices. Even a relatively low late fee of 2% is enough to prompt your client into action. But it’s not enough to just say a late fee will be charged; you actually have to charge it. Once again, consistency is key.
By the same token, you should also offer your clients incentive for early payment. Once again a relatively low incentive of 2% is enough but you can make it higher if you wish. Incentives are a great positive motivator to encourage your clients to pay quickly.
Make sure you list your payment options on your invoice so your clients can easily see how they can make a payment. Also, offering a form of electronic payment can increase the likelihood of you getting paid quickly by eliminating extra steps like writing and mailing a check.
Be sure to call your client within 48hrs of issuing the invoice to confirm that it was received. This also gives you the opportunity to check in with them and answer any questions they may have.
Once an invoice comes due give your client a call to offer a friendly reminder about the invoice and ask when you can expect payment. Often your client will be grateful for the reminder and will issue payment immediately.
Send reminders to your clients about their outstanding invoices. You’d be surprised at how often a quick reminder leads to immediate payment. All too often small business owners fail to send reminders either out of fear of offending their client or simply due to a lack of established procedure on their end. If you don’t remind your client about outstanding invoices you are doing a disservice to both yourself.
Establish a collection procedure and stick with it! Consistency is key to maintaining a positive cash flow.
Set up a separate email address for all your accounts receivable communication (like ‘accounts@’). This disassociates you from the collection cycle, in both your mind and in the mind of your client, which can help make the process easier by removing the personal element and showcasing it purely as a business function.