5 Tips for Faster Invoice Collection
1. Send electronic invoices and track when it was opened
Invoicing has come a long way since mailing printed documents in the past. You can now send invoices electronically to your clients directly inside Quickbooks or other accounting, billing and invoicing softwares. It is fast and cost efficient. Depending on the software, it may include features that allow you to:
- Track when someone opens and views the invoice. This helps you know if the client actually received and opened the invoice (an email address typo or the email ended up in their junk folder).
- Communicate in real-time with your clients about payments. See tip #4 below.
- Set automatic reminders before, on, and after the due date to facilitate payment.
2. Do not wait to get in touch with overdue customers
Over 1/3 of small businesses wait over 30 days past the due date to follow up or call their customers for payment. For each 30 days that you wait, you are 10% less likely to get paid.
If your bill is outstanding for 90 days, you have a 70% chance of collection.
If a client has not paid for over 180 days, you have a 50% chance of collection.
After a year, you have less than 10% chance of receiving payment.
In the last two scenarios, your accounts receivable risk is acute and you will likely need to consider more formal options for debt collection.
For new clients or clients who always pay late, a reminder email or duplicate e-invoice can help. But always get in touch the day the account is overdue.
3. Use outsourced accounts receivable specialists or hire your own A/R staff
Small business owners spend three days per month dealing with collections and accounts receivables. This time could be devoted to growing the business or being with your family. Also, conversations with customers about money can be awkward and may risk souring relationships.
On the other hand, large companies have a dedicated A/R department and get paid in less than 1/2 the time it takes small businesses.
Accounts receivable is a specialized finance function that requires specialized systems, skills and discipline. There is a reason sales, delivery and finance are generally kept as separate departments.
Whether you have your own A/R staff or an outsourced A/R service, make sure they are:
- Polite and professional.
- Communicate with your clients at appropriate intervals.
- Encouraging clients to pay online or over the phone, or make a commitment to the date of payment.
- Documenting all client conversations for history and traceability.
4. Communicate frequently to speed up payment
There are three main reasons for delayed payment:
- Your client simply forgot.
- You client had a problem with the invoice amount or the service/product provided. Instead of communicating this to you, they just don't pay. You won't find out unless you get in touch.
- Your client is also waiting for payment and is trying to extend credit / preserve cash.
It is human nature to want to "do the right thing." People will usually pay suppliers who are in touch on a regular basis and asking for payment. Call, text or email your clients at appropriate intervals.
5. Make invoice collections and accounts receivable management a key performance metric
Business growth and survival correlates to cash flow and speed of invoice collections. You should not need to scramble for payroll or put off purchasing new equipment because your clients owe you money.
Cash flow is the lifeblood of the business and you should be able to predict when each client is likely to pay.
To make accounts receivables a key performance metric:
- Put a 20-minute accounts receivable management meeting in your diary to analyze outstanding debtors each week.
- Measure "Days Sales Outstanding" (DSO) and make a target for reducing this key metric. DSO is used to calculate the average collection period - how quickly you are able to collect the money owed to you after the sale has been completed. DSO = (accounts receivable / total credit sales) x number of days in period.
- Use an accounts receivable management software to benchmark your performance.
- Celebrate actually getting paid just as much as you celebrate making a sale!
Accounts receivable and cash flow is tied to every business' bottom line. Take control of it by implementing these five strategies that will help you stay on top of invoices.
Have your own tips and tricks? Share them below!