What are the best practices for invoicing clients and collecting on payments faster?
I offer b2b services and had several questions about invoicing.
-How soon is too soon to expect payment of invoices? Are 7 days too quick?
-How often do you reach out if the invoice isn't paid on time?
-How many forms of payment should I include? Is it worth it to have a paid service i.e. Square to accept credit cards when they charge a percentage of payment? NOT SELLING GOODS, it makes sense if I was selling goods or services at a high volume.
There are no hard rules for terms. Vendors want to be paid immediately, and customers want to pay you as slowly as possible.
There are industry standards in every sector, but I assure you that everything is negotiable. I was in an industry for over twenty years, and the “standard” terms were net 30, which in reality meant you'd get paid in net 45 if you had all your paperwork appropriately done and submitted correctly. And as we got bigger, we chased more significant deals and contracts which in turn pushed terms to net 45 and net 60. About ten years into the business, AR became quite a bear (over 6MM), and I stressed over how to address it.
The big fear that every business owner has is… “what if” the customer goes elsewhere and we lose the business. Let that fear subside and don’t stress. If you lose any customers or any customers, don’t want to do business with you – good! You don’t want them anyhow.
I took a multi-faceted approach and all existing contracts; I personally addressed every one of them. Called the top dog at each customer and simply told them we have changed our business structure and have changed to Net15. Most all had NO problem with it – quite shocking! A few customers played hardball and said that if that’s the case, they will need to look elsewhere; I responded instantly to each one of them with – okay, let me know how fast you can find a replacement, we will continue shipping and supplying you for four more weeks. As I recall, two of the customers were quite significant, and I really didn’t want to lose them, but I was committed, and I wasn’t budging.
We lost NO customers. Even the net 90 guys ended up turning to net 15 pay. It was a game changer and allowed us to stop using our LOC to fund our customers, continue growing and have more cash in the bank.
The second facet of my approach was to incentivize my accounting department with quarterly bonuses for average DSO. We created a matrix and focused on achieving a net 15. Our accounting department took the initiative to pursue even better payment terms with their connections within our customer's accounting departments, and we consistently achieved less than Net15 average DSO. Our accounting team received a bonus and they were all tickled – giddy happy!
A few years later, I decided to start a similar but unrelated company, and my approach was 50% deposit and 50% upon delivery. There was lots of initial pushback… literally, our customers have no internal mechanisms actually to pay a deposit. I stuck to my guns (in a very understanding and empathic way) and said that we just wouldn’t be able to do business at this time. Miraculously, EVERY single customer figured out a workaround to get the checks sent out early and generally accompanied the purchase order. And many of these clients were quite significant. Not mom & pop operations.
Remember that most of our competitors were getting stretched out to net 60 and we were getting 50% up-front and the other 50% in net 15.
We outlined and documented a complete policy, the process, and every step of our procedure for exactly who we would call and when we would call, email, and exactly what we would say or wright. We started with the day we emailed the invoice and PO to ensure receipt. The next touch point was two days prior to the check being ready… again, to ensure it was ready as agreed. The day of we would do the same (if someone hadn’t called us already). In the event there was no payment – (it happens), we would call and email the next day and the next day and the next day until this was resolved. After one week, any existing POs, orders or shipments would be placed “on-hold” and not processed or shipped until the account was up to date as agreed. We simply took the position that we give phenomenal service and have a very fair price; in return, we expect to be paid as agreed. As time progressed, very few existing customers needed all then emails and calls – they were on board and in lockstep with us. And every once and a while we had to have a hard conversation with a customer and simply say that it's not a good fit. Presented properly, there was never any hard feelings. As you probably imagined, some companies aren't that agile, and they are so significant, they can't get a check out that fast.
Our preferred method of payment was a check or ACH. We did accept credit cards and charged an additional 3% - which frankly always seemed so stupid for a company to incur that cost, but many did.
Today, I’m involved with another start-up, and the model is also net 15. We simply explain that up front and if they really can't pay within our terms – we move on because it's just not a good fit for us. I can't think of a time when anyone was mad or angry over this. Most are all understanding.
The magic is to have clear and meaningful conversations with your customers. Over and over! If you're not having a conversation, you don’t have a relationship.
There is no accurate method of getting payment, but here are some tactics hope this will help you.
Penalties - An accrued penalty fee clause is a good practice of collecting late payment. With every passing week you can impose an extra penalty amount and then send weekly invoice to clients including that amount.
If you said that you will invoice on X date, then you must send an invoice to client to X date not on other dates, It shows how serious you are about your payment, don't hesitate to send a weekly gentle reminder.
According to your mentions, send invoice like a pro. Use tools like FreshBooks, QuickBooks or talk with an accounting expert.
If your due date is been passed and invoice has also been sent, then communicate loud and proud by following these set of guidelines.
Email - There could be hundred of valid reasons that your client is not responding to you. Send him/her a friendly mail to confirm they have received the invoice.
Follow up email - If clients replied you after giving invoice, but does not give you fix payment date, follow up immediately with an email reiterates of your payment terms and payment period with date of payment.