Most small business owners are not good at collecting invoices. Collections calls are often made haphazardly and only when the owner is short of money, needing funds to pay expenses. As a result, their cash flow and their business suffer.
The majority of small business owners usually claim that they’re too busy to make collection calls regularly. The reality, however, is somewhat different.
The truth is that business owners dislike making collections calls because they’re tedious and risky. Bad collections calls could create tension with clients and jeopardize future business. Consequently, the business is always on unsure financial footing.
Fortunately, it doesn’t have to be this way. Here are seven easy steps to help you get paid on time.
This step is the most important. Provide credit terms only to clients who have a good track record of paying invoices on time. Clients who don’t meet this standard should pay ahead of time. This approach should take care of most of your collections problems. However, proper follow-up is also important.
To learn more about offering net 30-day terms, read our previous article on Small Business BC, Should You Offer 30-Day Payment Terms to Your Corporate Clients?
One simple way to minimize payment disputes and client misunderstanding is to add an acceptance letter to your invoicing process. The acceptance letter is a short letter that your client signs after you deliver your product/service but before invoicing. The letter states that everything has been delivered according to the contract.
Using this letter often prompts clients to disclose any issues early on, which gives you the opportunity to solve them. Work with your legal counsel to develop a letter that gives you protections but isn’t so strict that clients will refuse to sign it.
Most contracts, especially those with bigger companies, outline a specific process to submit an invoice and get paid. Read this section carefully and follow its instructions to the letter.
If they ask that you submit the invoice and paperwork to a project manager, with a copy to the accounts payables department – do so. Otherwise, you risk an unnecessary delay in your payment.
When submitting an invoice, include a copy of the signed acceptance letter from the previous step. This step alone can prevent many problems from occurring in the first place.
Track your invoices weekly or more often if possible. The easiest way to track invoices is to use the invoice aging report included with all standard accounting packages.
Call the client once an invoice is a couple of days past due. Ask if there are any problems and if they can give you an expected payment date. Repeat this process if they miss the new payment deadline.
One of the reasons for using an acceptance letter (step #2) is to minimize the chances of a non-payment due to a dispute. However, disputes can happen even after the letter has been signed.
Determine if the dispute is valid. If so, address the problem immediately. It is always to your benefit to keep your reputation intact and your clients happy.
However, there are times when clients “manufacture” disputes as an excuse to get additional out-of-scope work from a vendor for free. If this happens, consider directing your client to the signed acceptance letter. This strategy usually solves the problem quickly. Otherwise, consider speaking to your legal counsel.
Always treat clients, even those who don’t pay on time, with respect and professionalism. This approach is both good business and a good collections tactic.
If your client cannot pay, try to find out why. Negotiate an extension or instalment payments – such as 30% now, 30% in a month and the rest a month after that. This arrangement is preferable to not getting paid or pursuing legal avenues.
If the client is unable or unwilling to negotiate, consider getting legal counsel or working with a collections agency. These solutions are usually the best options at this point.
This professional system will not only help you get paid on time, but will reduce the amount of time you spend chasing invoices out of your schedule. The key is to follow each step methodically.