We’ve seen it proven time and again: the key to effective invoicing starts long before you create and send your first invoice.
It sounds crazy, right? How can you build effective invoicing processes without actually invoicing a customer? But in order to make sure you get paid in a timely manner, you have to start customer relationships with the invoicing and payment process in mind.
Just consider a typical business-to-consumer (B2C) retail transaction for a minute. Sally walks into the flower shop on Main Street. She decides to buy a beautiful bouquet for her sister’s birthday. She selects the bouquet, takes it to the register, and pays upfront with cash or a credit card. There’s no invoice needed as payment takes place immediately.
Let’s flip take that story and re-apply the rules of invoicing. Sally walks into the flower shop on Main Street and selects her bouquet for purchase. Instead of paying upfront, the shop owner says she’ll invoice Sally for the purchase at a later date. And then what?
Business owners are often leaving a lot to chance when it comes to invoicing, which can translate to slower payments and even lost revenue if they’re not careful. So what can they do to safeguard their business from loss? Here are 5 critical best practices that offer the best chance of invoicing success:
Negotiate payment terms with customers upfront.
Payment terms, or lack thereof, can really make or break your business. Without an idea of when you want to be paid, and a commitment from customers to meet that timeline, cash flow can go from positive to non-existent.
However, it isn’t always up to you. Many industries have standard payment terms that are acceptable to customers, and each company may have their own definition of what’s appropriate. So it’s important to come up with what you want, do some research about what’s standard in the marketplace, and try out some payment terms to see how they work.
And the really key word here is UPFRONT. It’s critical to go through this exercise at the beginning of a customer relationship. Sally may walk into the flower shop and want to purchase some flowers. What if you want her to pay NET 30 and her standard payment window is NET 90? The two of you need to come to an agreement before she leaves.
Use incentives to drive desired invoicing behaviors.
It’s absolutely imperative that you and Sally come to an agreement on payment terms. Let’s say you want NET 30 and Sally wants NET 90, so you settle on NET 45. Sally may have the intention to pay you in time for the due date, but it isn’t urgent – unless you make it so.
As part of your brainstorm on payment terms, consider the use of incentives. Maybe you tell Sally that if she makes her payment within 30 days (as opposed to 45), you’ll give her a 5% discount. Alternatively, you could let her know that if she goes beyond the NET 45 due date, she’ll incur a 3% late fee.
Expiring discounts and time-based late fees can give your customers the extra push they need to pay according to your requirements. However, you’ll have to do better than telling them once. As you build out your invoicing processes, configure them so there are multiple reminders to meet payment deadlines.
Gather all the appropriate information and record it on the invoice.
What if Sally walks into the flower shop, chooses a bouquet, agrees to your payment terms, and leaves without giving you any contact information? Think about that scenario as you consider what inputs are required from customers for each transaction. Things like the person’s name, the name of the business, mailing addresses, phone numbers, and email addresses all seem straightforward.
Don’t forget to consider other data that might be relevant to your customers. Do businesses in the industry you serve require a purchase order (PO) number on any invoice before paying it? And the person making the purchase (your contact) will likely not be the same person paying the invoice. So who should you address the invoice to?
Take all the relevant customer data and record it on the invoice for easy reference. And include your payment terms and any discounts or late fees as well. This information will make it easier for the accounts payable staff to prioritize your invoice appropriately.
Find out if customers require any specific processes – and adhere to them.
Sadly, you could do all this work to safeguard your cash flow and still have trouble with delayed payments. How is that? The important thing is to know your customer.
The larger the business you are serving, the more likely there will be stringent invoicing requirements. Big businesses with lots of suppliers have sophisticated accounts payable systems. They may not even consider doing business with you unless you meet all their requirements.
Sometimes this means sending the customer an invoice in a certain format- not just a PDF or an online link. You may need to format it into XML so the invoice can be automatically loaded into the accounts payable system – just to get you in the queue to be paid.
Send your invoices on time.
Now that you’ve pre-built your pre-invoicing processes, be sure to do the thing that many businesses don’t: send your invoices on time! It’s tough to stress how important this single step of the process is, so we’ll just say this: how can your customers pay according to your requirements if don’t send them an invoice?
And while you’re at it, set up reminders on a timely basis as well. If you’ve worked out payment terms of NET 45 with Sally, send her the invoice when you create it, and then send her reminders along the way (NET 25, NET 40, and NET 44, for example). She’ll thank you for those reminders – especially if there’s a discount or penalty tied to timely payment.
By preparing ahead of time, on-time invoice payments can be a reality.
The excitement of the first customer may cause business owners to skip over invoicing. However, it’s critical to pause and take stock of existing invoicing processes, especially if payments are late or non-existent. By making some upfront preparations, businesses can increase cash flow – and peace of mind.