Did you know you could improve cash flow in your business by streamlining each step of your invoice process? Simple changes from conception through to cash receipt can make a huge difference to your bottom line, giving you healthier cash flow and more time to grow your business in the right direction.
Guest post by Eve Blackall, Director of Smart Accounting.
The invoice process
From the moment a sale occurs to the time you get paid, an invoice goes through various stages in its life cycle. By understanding, monitoring and tweaking your invoice life cycle you can improve your cash flow, boost profits and worry less about debtors!
Knowing and managing every stage efficiently can make a huge difference to your bottom line, especially for start-ups and small businesses where financing costs are high. Create and use reports at various stages to your advantage. By understanding the patterns of your cash flow, sales and debtors you can make informed decisions about frequency, speed, and patterns of payments and adjust spending accordingly.
Step one: Set-up
Active invoice management (i.e. not just sitting around waiting to get paid) may seem like a time-consuming task, but so is stressing about cash flow. Stressing isn’t helpful to your business or your clients and customers – active invoice management however is.
Firstly it’s important to get the right tools and set-up cash flow support systems. This will involve:
Using your accounting package – this saves time and effort in not having to track and sort out invoices manually. Imagine thumbing through your invoice pad/book each time to work out who has paid, who still owes money and who a bad payer. By creating the invoice in your system, tracking becomes is as simple as looking at a screen.
Have very clear terms and conditions and enforce them – Regularly remind your customers of what you are expecting. This can be done in a number if ways such as handing your terms to customers when you do the quote, printing a copy of your terms on the back of your invoice or re-sending terms with your invoice reminders. If you have a clear policy and communicate that you expect everyone to stick to the policy, then follow up by doing what you said you would do people are less likely to push your cash flow boundaries.
Your invoice template must be accurate and contain all the necessary details such as: ABN, contact details, reference to the job, etc – don’t create any excuses for late payment.
For quicker payments, set-up multiple payment methods such as EFT, PayPal and other electronic payments. Highlight all these opportunities to pay in your terms and on invoices to make it as easy as possible for your clients and give them opportunities to make excuses.
Step two: Conception
The birth of an invoice is not necessarily when it’s generated and printed. It can be when you do a quote or when the customer puts in the order (Purchase Order or PO) for your business to do their work or sell them something. The quote and PO then becomes the invoice for that sale. Your accounting system has a seamless way of stepping through this and ensuring you invoice exactly what was agreed and is expected by your customer. Again clarifying what your customer expects from you and what you expect in return from your customer.
If your terms and conditions require a deposit up front then always make sure you have the capacity to have your paperwork ready at the start of the job. Print an invoice for the full amount and send it to the customer before you start the work. If you have appropriate terms and your customer is informed you can always issue a second invoice for “extras” in the middle or at the end of the job.
If a customer can’t make the deposit, don’t start the work. This raises serious questions as to whether they will be able to afford the job you are about to start and rarely indicates that they will be good payers who respect your cash flow.
Step three: How it travels
At the dispatch stage, an invoice is printed and posted, or emailed.
Emailing – reduces the risk of delayed, or lost post but can end up with your invoice stuck in the inbox of someone on leave. Always send your email invoice with an ‘open receipt’ or ‘read receipt” (you may need to adjust your email settings), so you can see it has been looked at. Best Practice for larger business clients is to send a copy of your email to the person you were working for and cc in the accounts department on the same email. This way several people in the business are aware you need to get paid right from the start.
Snail-mail – has the disadvantage that it is difficult for you to monitor when it was received and opened, but it seems a piece of paper is harder to ignore than an email. When you invoice larger businesses again send two copies, one to the person who placed the order and one to the accounts department (make sure you advise each of the other’s copy).
Step four: Follow-up
Unfortunately late payers are common and chasing them is not fun! A system with alerts on overdue payments can offer a tremendous advantage to the business’s cash flow.
Being punctual about reminders and debtors’ calls show your customers you are in business and mean business. If you don’t like making dreaded phone calls to chase your clients, try SMS and email reminders. They’re particularly effective in the early stages.
Even if you are a sole trader, have someone else call your debtors during the early and mid-overdue phases, that way you can become the person of last resort, and your call means ‘we are suspending business with you, as it appears you do not respect us. By the way we are passing your invoice onto the bailiff.’
The best way to reply to the “I can’t pay the full amount right now” response is to ask:
How much are you short?
By asking for a specific sum you make it much harder for the client to offer to send you, for example, only $500. If they have to admit they’re $3,500 short of the $4,000 account they will be quite embarrassed so the chances are you will get paid more and more quickly this way.
Step five: Happy ever after
The sight of money coming in is the best sight of all for a business owner. At the collection stage, check for accurate matching of funds received, with the right client and properly manage complex invoicing issues like part-payments or one payment covering several invoices. Nothing harms your credibility or makes a client more annoyed, than a debtors call for a bill that is already paid.
Where can your invoicing process improve? Review your system and tweak it where necessary to keep cash flowing, then share your ideas in the comments below.
Eve Blackall works with some of the top 100 ASX listed accounting firms, in addition to operating her own highly lucrative practice. Eve is the author of ‘Profit-ology’ the ultimate guide to deciphering your P&L so you can give your own business a profit making make-over http://smartaccounting.com.au/
This blog is for general information purposes only and is not financial advice.