May 08, 2020

How Not Handling Invoices Properly Can Lead to Cash Shortages

Depending on your attitude and experience as a small business owner, invoicing is either an extremely satisfying or a very frustrating process.

Although your company is centered on whatever work you do, you probably don’t actually get paid for anything unless an invoice is submitted. Therefore, the invoicing process is an essential component to the success of your business.

On one hand, this can be a very gratifying moment—you cap off a job well done by submitting an invoice and awaiting payment. That job is finished and shelved away.

However, if your invoicing procedure is disorganized or your clients are slow to pay, then invoicing can be a nightmare.

In the worst-case scenario, poor invoicing habits can lead to a cash crunch—when you don’t have enough revenue coming in to pay out essential expenses, like payroll for your employees.

The theory here is that invoices are required for cash to come into your business. If you aren’t on top of your invoices, there is a blockage in your cash flow. You may be working hard, but the cash you are earning is not flowing into your bank account. Then, as you pay for your expenses, your cash supply is depleted, leading to a shortage and, potentially, a funding emergency.  

Don’t fret, though. You can improve your invoicing skills right away and improve your cash flow.

From the outset, you should make it very clear about how you expect to get paid before you do any work. Then you need to keep everything clear upon collecting.

“The first step that you can take to ensure prompt payments from your clients is to clarify your payment terms,” notes small business expert Hannah Skentelbery. “It is important that your terms and conditions are clear and agreed upon by your client before you start working with them.”

In this way, invoicing is very similar to creating contracts—but just on the other end of things.

“It is best if you have a written contract that includes how and when you will be paid for the services you will render or for the products you will deliver,” Skentelbery continues. “Make sure to include fees for late payment, as well as discounts for early payments as applicable.”

If you find your clients are late to pay, there are several routes you can take. You might find it best to require up-front payment.

“If payments are routinely received late, you may have to adopt different policies,” recommends legal services provider LegalNature. “For instance, you can require an initial deposit before starting any work and/or require full payment before finishing any work. These tactics are especially effective for freelancers and can provide useful revenue on the front end of projects.”

Assuming your clients are acting in good faith, you can put them on a payment plan if that works for your business plan.

“Furthermore, also allowing customers to make partial payments instead of only lump sum payments can smooth out your cash flow and make it easier and more manageable for your customers to repay,” LegalNature suggests.

Cash flow is closely linked to timing, and so is invoicing. Tech entrepreneur John Rampton suggests sending out invoices as soon as the work is finished.

“The best time to send out an invoice is immediately following the completion of a project or a sale,” Rampton wrote in Forbes. “Unless you have another financial arrangement with your clients or customers, you can’t afford to wait to send out an invoice.”

Rampton says that his company found that when it invoiced a client the same day a job was completed, it was 1.5 times more likely to get paid.

Another habit to acquire is how to remind clients about unpaid invoices. This situation can be uncomfortable for some small business owners because you might have to get tough.

“Even if you’ve made invoicing a priority and send them out immediately or frequently, there will be times when the client misses the due date because they misplaced the invoice, simply forgot about it, or are just deadbeats,” Rampton continues. “Like sending invoices in the first place, this is your responsibility to follow-up on unpaid invoices. Contact the client immediately to find out what’s going on and use invoicing software that sends out automated reminders.”

You will want to follow up on invoices on a consistent basis. If you are still waiting for payment one or two months after you expected to get cash, you probably want to contact an attorney—at least so that you can tell your deadbeat client that you are in contact with an attorney.

While invoicing is not why you went into business, unless you’re a professional invoicer, it doesn’t have to be a constant headache if you keep good records and aren’t afraid to follow up.  

About the author

Barry Eitel
Barry Eitel
Barry Eitel has written about business and technology for eight years, including working as a staff writer for Intuit's Small Business Center and as the Business Editor for the Piedmont Post, a weekly newspaper covering the city of Piedmont, California.

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