Every business has to deal with customers paying invoices late. It’s one of those annoying jobs that you really shouldn’t have to do, but you do.
Realistically, you should expect to have to chase up overdue invoices relatively often.
One thing that can help to reduce the time spent pursuing late invoices is auditing your own accounts receivable.
Carrying out an audit of accounts receivable is a great way to reduce late payment of your invoices. Ensure your receivables balance is correct and look for trends in late-paying customers that you can use to encourage prompt payment.
What does auditing accounts receivables mean?
Auditing accounts receivable involves monitoring your customers’ accounts to recognise when invoices become overdue.
This should be a regular task quickly reviewing all invoicing activity to ensure all overdue invoices are followed up. This also helps to recognise serial late-paying customers so the business can take action to reduce how often this happens.
Unlike regular company-wide audits, auditing accounts receivable is a constant process – not a one-off activity at a certain point in time.
Being aware of accounts receivable at all times is one of the best ways of navigating late invoices to ensure as many as possible are paid on time.
Objectives of auditing late invoices of your customers
The impact of unpaid invoices on your business can be significant, and auditing your invoices is primarily about getting them paid on time.
Unpaid invoices are a leading contributor to negative cash flow, when a business doesn’t isn’t generating enough money to cover its outgoings. 82% of businesses that fail cite cash flow issues, and this is one way to prevent that from happening to you.
Other key objectives of an accounts receivable audit include:
- Ensuring the value of your receivables on your balance sheet is accurate
- Checking any refunds have been properly processed
- Ensuring proper measures are in place to prevent misappropriation of non-electronic payments (i.e. cash)
Procedure for auditing accounts receivables
Receivables audits involve a range of different steps, many of which can be done in any order. A typical order procedure includes these techniques:
1. Inspect order documents
Matching order documents with invoices ensures they’re for the same amount, so customers are being billed what they should be.
If they’re not, and you’re invoicing customers for the wrong amount, you’ll either be overcharging them, prompting them to query invoices (which often means they get paid late) or undercharging for the work you’ve done.
2. Compare receivables with your balance sheet
When you add up the total of your accounts receivable accounts in your general ledger, it should equal the balance in your period-ending reports. If they don’t match, it’s likely there’s been an incorrect journal entry somewhere in the ledger. You can easily get this information from your accounting software.
3. Match invoices to the shipping log
Compare the dates of the invoices with shipment dates of the corresponding items to make sure invoices are being included in the correct period. Again, this ensures that customers are being invoiced the correct amount for what they’ve purchased.
Side note: This step is helped when a business invoices customers soon after purchases are processed. Invoicing as soon as work is completed means they’re due sooner, which means you get paid sooner.
4. Confirm receivables
Confirming receivables happens by contacting customers with balances owing to verify your business’ receivables balance at a point in time. This has a side-effect of notifying customers about their outstanding invoices to reduce the risk of paying invoices late.
5. Reviewing non-electronic payment receipts
This step may not be necessary if your business only offers electronic payment on invoices, or if customers don’t use cash or cheques. However, it’s worth making sure that all invoices were paid electronically in case customers have paid by other means.
6. Reviewing credit notes
Credit notes impact the value of accounts receivable, because customers will end up paying a different amount to what they were invoiced.
Reviewing credit notes also has the added benefit of ensuring they were issued legitimately, with the proper authorisation and in the same period they’re reported under.
7. Trend analysis
This is where businesses get the main benefit of the audit. By analysing the trend in your accounts receivable, you can dig into the patterns and influences behind your receivables balance.
In particular, you can recognise serial late-paying clients and begin to identify signs which show that customers cannot pay invoices on time. This helps to effectively chase outstanding invoices because you’ll have more context and understanding about why these customers aren’t paying invoices when they’re due.
Effectively handling late invoicing from your customers
Being able to effectively chase outstanding invoices is extremely important. Late invoices put negative cash flow pressure on businesses, meaning you have to find money from elsewhere in order to cover running costs.
For businesses that run on tight margins and don’t have large bank balances, this can be a precarious situation to be in.
Read more: How to invoice like a pro
These are some of the best tips to follow up overdue invoices and encourage prompt invoice payment:
Clearly define payment terms
Payment terms state how soon invoices should be paid and how they should be paid. If your business charges late fees on invoices, the payment terms define how a late fee will be calculated.
By having a clear set of agreed terms with customers from the outset, you set a standard and encourage them to live up to it.
Charge late fees
Charging a late fee on overdue accounts encourages customers to pay invoices on time. Allowing an early payment discount has the same effect – it makes it in your customers’ interests to pay invoices promptly.
Late fees can be set rates each time or be based on the value of the invoice. Decide whether to charge late fees or interest on overdue invoices, and make sure you tell customers about it in advance – this is a legal requirement. As above, include it in your payment terms.
Be deliberate and clear in your invoice late fee wording so you can reference it later if need be.
Use automated invoicing software
Using invoicing or accounting software makes invoicing easy, including recognising overdue invoices. Not only that, but you can automate reminders to customers about when their invoices are due.
Create tactful late invoice reminders and schedule them for specific time periods, including before an invoice is due and the day it’s due. This ensures chasing late invoice payments doesn’t take up anywhere near as much of your time.
Stop working with late paying clients
Everyone has their own threshold over when enough is enough. If a client is always late paying invoices or their account is well overdue, you’re within your rights to refuse to do business with them anymore.
Consider the balance of how each option impacts your own business – keeping the customer on or effectively firing them.
Even discussing the possibility of cutting a client off may provide the impetus for them to stop paying invoices late all the time.
How can Fundtap help with late payments?
As mentioned, one of the biggest issues of late invoice payments is the negative cash flow pressure it puts on your business. While FundTap doesn’t help customers pay invoices on time, it does help to improve your cash flow in the meantime.
FundTap uses modern invoice financing to lend businesses the value of their invoices. This creates the effect of the invoice being paid straight away, and allows businesses to pay bills, invest and grow their business. It works too – in the last two years, the average FundTap customer has grown their turnover by 54%.
The fact FundTap doesn’t chase late invoices is actually a benefit – you don’t have a third party contacting your customers about paying your invoices, and you don’t have to go through the admin of changing the accounts that customers pay into. It also allows businesses to be discrete about the types of finance they use.
FundTap is designed to be flexible and easy to use. Getting approved for finance is paperless, and takes just one day. Once approved, it integrates into your online accounting software so you can submit an invoice for funding at the click of a button.
You don’t have to use it for all your invoices either, which keeps costs down and gives you a safety net to improve business cash flow when you need it. There are no system or subscription fees, or other hidden costs. Other providers require businesses to use them for all invoices.
Check out related articles & resources.