Most businesses that invoice customers later struggle with getting all their customers to pay in full and on time. This is especially problematic when your cash flow is tight and you have to make payroll. The good news is that collections are largely within your control. While you may not be able to make every customer make timely payments, you can implement processes that will greatly improve how much you collect and how quickly you receive it.
Start With Strong Bookkeeping Services
The most important thing to do is to understand exactly how much you're owed at all times. Many businesses pay so little attention to overdue accounts receivable that they continue to ship tens of thousands of dollars of products to customers whose accounts have been delinquent for months.
Your bookkeeping system should allow you to instantly generate a report that shows all your receivables sorted by when they were due.
Follow a Fixed Billing Schedule
The time to worry about collections is not when you realize your business is short on cash. It also isn't whenever a manager gets around to it.
You should establish a fixed billing schedule for sending your initial invoice, following up on outstanding balances and starting collections action. For example, you might send an invoice on delivery, a follow-up email after 10 days, a phone call after 20 days and a letter after 30, then go to collections after 60.
The exact timeline will depend on practices within your industry, but once it's established, you should adhere to it firmly. Your internal or outsourced accounting services should provide you with, at minimum, weekly reports telling you which accounts need to move to the next billing stage.
Use Early Payment Incentives
Early payment incentives are popular even in contracts between large companies for a reason. Managers looking to cut costs prioritize bills that are discounted if they pay sooner. Even small discounts like the common 2 percent, net 30 (2 percent discount if paid within 30 days) can help.
This doesn't mean you need to cut into your own margins. Simply raise your prices so that your discounted price is what you actually want to charge.
If the customer misses the cutoff for the incentive, you'll earn a little extra revenue. Customers are also much less likely to become upset about not getting a discount than they are over being charged late fees.
Always Ask Nicely First
Some business owners take it personally when a customer pays late or view the customer as a deadbeat and become rude. Most customers are not intentionally trying to avoid ever paying. They may have cash flow problems of their own or a disorganized accounting department, or they may have just misplaced your invoice.
If you start by aggressively demanding payment, customers will go on the defensive and seek ways to get out of paying even if they were planning to. If you stay polite and professional, most will work with you.
Consider using the following billing process.
- Email invoice with shipping information
- Paper invoice packaged with your delivery
- Reminder email halfway between delivery and the end of your early payment discount period — frame it as trying to save the customer money
- Follow-up phone call three days before the end of your discount period
- Phone call one week after the end of your discount period reminding the customer of the final due date
- Polite reminder letter as soon as the due date passes
- Sterner, but still professional, letter making final request for payment sent 30 days after the due date
- Send the account to collections 60 days after the due date
Concerned your bookkeeping processes are inhibiting your collections process? Our bookkeeping services may be able to help.