Business invoicing: steps to avoid bad debts

How well you handle business invoicing can make or break your business. There are a number of different methods, so let’s look at some of the key factors in running a successful accounts receivable process in a typical small business.

By typical small business, I mean one that offers credit terms to its customers and sends out invoices.

There are three steps in the process, namely:

• The when and how of sending invoices
• Giving customers various methods of payment
• Terms of business

1. The when and how of business invoicing

When you do your business, invoicing can have a significant impact on your cash position. Not recovering money is probably the most significant factor in business failure.

Staggering as it seems, one business owner advised me he only sends out his invoices when he runs out of money!

It’s easy to get sidetracked with sales, marketing and delivering a product or service and fail to collect payment. Yet if you don’t keep the cash coming in, you quickly struggle to run other aspects of your business, like paying suppliers.

If you can get a systematic program for business invoicing, you are well on the way to good financial management. The sooner you invoice customers, the less money you need to borrow to cover running costs.

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If it’s handwritten on scrappy paper, customers will likely treat it casually. It is more likely to be treated seriously if it looks professional and contains all the details.

One of the most essential details to be included on any invoice is the credit terms, i.e. how many days the customer has to pay.

You would be amazed at how many businesses omit this from their invoices. The problem with not detailing credit terms is that customers will make up their own! They will decide to pay you when they feel like it…or when they can. Suppliers who have put credit terms on their invoices will likely get paid before you, so give yourself a head start by putting credit terms on your invoices.

2. Giving customers various methods of payment

Giving your customers various methods of payment will help to speed up payment. Some people still like to write cheques, some like to pay using Internet banking, and others want to pay by credit card. Credit card merchant fees can be expensive, but not as expensive as waiting 60 or 90 days for someone to write a cheque. There are many payment methods available, so why not utilise them to ensure you get paid?

3. Terms of business

Many businesses get excited about their product or service and forget about getting paid. Recovering money is the first thing to think about in business. This means ensuring your customers understand how much, when and how they should pay. The best way to achieve this is to have a simple ‘Terms of Trade’ or ‘Terms of Business’ document.

This can be given to your customer when you have finished the sales process; that way, there can be no excuses for late payment.

Those selling products can contain a clause in their Terms of Trade about ownership of any goods until they are paid for. A clause like this can save a business from ruin when a big customer goes into liquidation, holding onto unpaid goods. Ownership clauses may bestow the right to retrieve unpaid goods.

Credit checks are also an excellent way to deal with potential slow payers. If a customer can’t give you at least three credit references, you may be better off avoiding them. No sale could be better than a bad debt!

Sue Hirst is the founder of CAD Partners (also known as ‘CFO On-Call’), a team of Financial Controllers who can help business owners grow their businesses safely.