Unpaid Invoices And Their Impact On Your Business

Unpaid invoices might look good on your balance sheet, but in reality they’re actually a bit of a pest.

The wait for customers to pay invoices can be a nervous one, particularly if you’re digging into your bank account to cover bills and overheads, and fast running out of cash.

This is the reality for many small businesses – walking a cash flow tightrope every month and having to work hard to get enough money to finance their growth.

This article is everything you need to know about handling late invoices to increase cash flow in your business.

TL; DR

Unpaid invoices are a big contributor to cash flow issues that are common in businesses that go under. It’s worth taking the time to improve invoicing systems to encourage prompt invoice payment and enable better business cash flow.

What is an unpaid invoice?

An unpaid invoice is one that’s been sent to customers that you’re waiting for payment on. It doesn’t always refer to an overdue invoice, but in this instance, that’s exactly what we’re looking at.

How unpaid invoices impact your business and cash flow

In many businesses, accounts receivable are among the biggest assets they have.

Accounts receivable are a significant asset – but mostly in the future. In the present they’re actually not that much use. You can’t pay a bill with accounts receivable. You can’t pay staff with it. You can’t use it to pay for a marketing campaign or to purchase new equipment.

The costs of running and growing a business can only be paid for in cash. Unpaid invoices are a signal of cash that your business will have in the future, but right now, you need actual cash to pay for all the things that allow your business to run.

Having money tied up in accounts receivable creates cash flow issues because you’ll have outgoings that you need real money for. More than 80% of businesses that go under cite cash flow as the number 1 issue, and this shows the worst case scenario that can stem from unpaid invoices.

Most businesses send invoices that are payable in 30 days. They’re likely to have a range of outgoings in that time that they need to have the cash on hand to cover.

If the customer doesn’t pay the invoice on time – and this is fairly common – then the business must continue dipping into its own pocket to pay for its outgoings until they settle their balance.

This is an example of a negative cash flow cycle that comes from unpaid invoices. It’s important to understand the causes of overdue invoices so your business can take steps to encourage prompt invoice payment as much as possible.

What can you do to prevent having unpaid invoices?

Preventing unpaid invoices is like leading a horse to water – you can never guarantee your customers will pay on time, but you can do everything you can to make it happen.

• Adding interest to unpaid invoices. Charging customers extra is a great way to encourage them to pay invoices promptly. Many customers will have multiple invoices due at once, so charging interest on unpaid invoices is one way to make them prioritise paying yours first.
• Set up good payment terms. Payment terms outline the rules of engagement between you and your customers when it comes to paying invoices. They commonly include how long customers have to pay invoices, the accepted methods of payment and details of any late fees.

Take the time to set realistic payment terms for your customers to set the standard from the outset. Send them with every invoice so you can always refer back to them if need be.

• Send invoice reminders. Notify customers that they have unpaid invoices BEFORE the due date. More on this point shortly…
• Make your invoices clear. Customers should be able to pick up your invoice and have all the information they need right there. This includes your business name, what you’re charging them for, the total invoice amount and the due date. Itemise invoices to reduce the chance of confusion or queries that delay payment.
• Be wary of who you offer credit to. Earning revenue through invoicing creates the risk that you might work for a customer who can’t pay you. If you can identify signs that customers cannot pay on time in advance, you can save yourself a whole lot of trouble down the track.

5 tips to collect unpaid invoices

So what can you do if, despite your best efforts, customers still don’t pay invoices on time? Chasing unpaid invoices can be frustrating and take much-needed time out of your day, but just about all businesses have to do it at some point.

1. Send a reminder. There’s often no reason why customers haven’t paid an invoice on time, so simply following up to remind them an invoice is overdue is enough to get them to pay it. You can send reminders before an invoice is due and on the due date as well, to reduce the chance of forgetting.

Invoicing and accounting software makes it easy to save time sending reminder emails too. Create tactful late invoice reminders and schedule them for specific time periods so customers are contacted automatically.

2. Send an overdue invoice

There’s actually no real difference between an overdue invoice and a normal invoice, apart from an ‘overdue’ stamp. This just creates a sense of urgency.

3. Speak to the customer

Sending emails is all well and good, but if you’re not making any progress then there’s nothing like getting the customer on the phone. It can clear up any miscommunication and give you piece of mind that you’ve been heard.

In saying that, you don’t really have to say much – it’s the customer who has some explaining to do. It’s their responsibility to pay an invoice, and you don’t need to justify why you’re calling.

4. Charge late fees on invoices

As we’ve mentioned, charging late fees on unpaid invoices makes it in your customers’ interests to pay them on time. You can’t just spring late fees on a customer though – legally, they need to be outlined in advance. This is where having payment terms comes in handy.

There is no standard interest rate for unpaid invoices, but anything more than 10% is likely to be seen as exorbitant. Remember, interest rates are calculated per annum, so it won’t be 10% of the value of the invoice, it’ll be 10% of its value over a year.

5. Cut them off

Cutting off a customer will escalate the situation, and could damage your relationship. However, if you’ve tried multiple times to get an overdue invoice paid, then it could prevent you from losing even more money by continuing to offer them credit.

Recovering debt from unpaid invoices

If you’ve done everything you can to follow up unpaid invoices without any luck, it’ll be tempting to just cut your losses. Recovering debt from unpaid invoices can be more expensive than it’s worth, and it can take up a lot of time that may be better spent concentrating on running your business.

However, if you don’t want to give up, there are more avenues available to you.

– Call in a debt collector. Debt collectors are professionals at handling overdue invoices from late-paying clients. This takes the role of collecting outstanding balances off your plate, which can be a big relief.

– Appoint a solicitor. There are a range of legal options you can take to chase outstanding debts, ranging from mediation through to taking customers to court.

As above, these can end up being expensive and exhaustive, and it can risk tarnishing your reputation publicly. You can always talk to a lawyer about your options and make a decision about if you want to proceed from there.

Final thoughts

Having unpaid invoices puts pressure on business cash flow, particularly in small businesses that run on fine margins. It’s worth putting systems in place to ensure your invoicing process enables and encourages customers to pay invoices sooner as quickly as possible.

You can also set up invoice financing to help to ease the negative cash flow situation that unpaid invoices create.

Invoice financing is lending based on the value of your invoices, and allows businesses to cover their outgoings while they wait for invoices to be paid.

Find out more about how invoice financing with FundTap improves business cash flow today.