Many business owners haven’t been involved with much invoicing before they start out. They’re experts in their fields, but they don’t really know much about invoice admin.
This is invoicing 101 – everything you need to know to set up an invoicing system that promotes positive cash flow in your business.
It also includes how to manage overdue invoices, including follow up tips that give you the best chance of getting customers to pay what they owe ASAP.
Take the time to set up an invoicing system that gives you what you want while also being user friendly for customers. Getting it wrong can impact business cash flow, but getting it right enables customers to pay invoices on time, which is a huge benefit to businesses.
Importance of invoices for account receivables
While invoices themselves are fairly dull, they hold the key to something all businesses need – revenue.
As an administrative tool, your invoices should be clear and easy for customers to read, understand and action. If they can’t, this means your business doesn’t get paid.
Not only that, but they need to enable businesses to get paid how you want, when you want. This means outlining payment options and the due date for an invoice so it’s obvious to the customers who receive it.
Without these two key details, you’ll find yourself chasing customers who haven’t paid their accounts on time.
What should be included on an invoice?
There are a few key pieces of information that MUST be included in your invoices. Missing any of these details can lead to customers not paying invoices on time.
- ‘Invoice’. Call it what it is, so it isn’t confused with a quote or a credit note. Use the word Invoice somewhere near the top, so it’s prominent.
- An invoice number. Using a unique number helps to track payments and your receivables.
- Your company name, address and contact details. So customers know what the invoice is about, and can contact you with any issues or queries.
- The company name and address of the customer. Yes, customers know their own name and address already, but this is so they can claim back any GST they’ve been charged.
- A description of the goods/services. Detail exactly what you’re charging them for, as clearly as possible.
- The supply date. When the sale/services took place.
- The invoice date. The date the invoice is sent informs the date it’s due.
- The amount that’s due. It almost goes without saying, but the amount owing is one of the key pieces of information on an invoice.
- The total amount payable includes any GST or other charges.
- The due date. When you expect to be paid by.
- Payment instructions. All the ways the customer can pay the invoice.
It’s also a good idea to send payment terms with all your invoices too. Payment terms are agreed with customers in advance, and outline how soon you expect invoices to be paid, the payment methods you accept and any late fees you may charge.
Set realistic invoice payment terms for your customers to maximise the chance of having them paid on time, and send them with every invoice so they’re easily referenced if need be.
So what happens when a customer doesn’t pay an invoice on time? Every business has to deal with late-paying customers sooner or later.
1) If it’s a one-off piece of work, send the invoice as soon as the work is done. Don’t wait until a certain time of the month, unless it’s ongoing work for a regular customer. In that case, invoice on the same day of the month, every month.
Pro tip: if your customer has a dedicated finance department, cc someone who works in finance into every email that’s related to invoices. This will help to get them paid on time.
2) Send a reminder email one week before the invoice is due to be paid. Be polite and courteous – ideally the customer will pay the invoice then and there, but it’s more likely they’ll schedule a payment for the due date. Keep this in mind with the way you word the reminder.
Pro tip: schedule reminder emails to go out automatically using your online accounting software. This makes chasing up invoice payments much more hands-off.
3) Send another reminder email the day the invoice is due. Be aware the customer may have made payment already that day, so mention that they can disregard the email if that’s the case.
4) If an invoice still isn’t paid after a week, send another reminder. Tell them the invoice is now overdue and invite them to get in touch if there’s an issue.
5)After two weeks, contact the customer again. You can start to become more assertive with your tone, outlining that the invoice is well overdue and that it should be paid ASAP.
6) If an invoice goes unpaid for a month, look to get the customer on the phone. Ask them if there are any issues, if they’ve even received the invoice, and when they might be able to pay it. You can ask why payment is late, but often this won’t actually help to get it paid any sooner.
7) Consider next steps. If you’re still having no luck getting the invoice paid, think about what you can do. More tips on this point below…
Tips to avoid outstanding invoices
The most effective tips to chase overdue payments from customers include:
- Send an overdue invoice. This is essentially the same as the original invoice, but with the word ‘Overdue’ on it to stress its lateness.
- Charge late fees. An invoice with a late payment fee is likely to get paid before one without a fee, because it reduces the customer’s costs. Just make sure you outline late fees in your payment terms – this is a legal requirement.
- Create thoughtful late reminder emails. As we’ve mentioned above, you can write, schedule and automate reminder emails in your online accounting software to prevent customers from simply forgetting to pay invoices.
- Cut customers off. Stop doing business with customers until they’ve paid their balance. This is a more aggressive move and may damage the customer relationship, but continuing to do business also risks losing even more money.
- Call in the pros. If the customer relationship is terminal, then hiring debt collectors or a lawyer can help to recover what you’re owed.
Take home message
Setting up your invoicing system doesn’t need to take a lot of effort, but it’s vital it’s done correctly.
It can help to spend time understanding your industry norms. If you stick to what customers expect, you’re less likely to create issues that lead to late invoice payment.
For example, in construction, invoices are often payable within 90 or 120 days. This is much longer than in other industries, so making an invoice payable within 30 days – which is the norm in many sectors – may not work.
Online invoicing or accounting software makes invoicing much easier. Xero, QuickBooks, MYOB and Reckon are popular options that help to create a standardised, automated invoice system that’s easy to set up and makes invoicing simple.
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