We all know that prompt payment of your outstanding invoices is key to maintaining solid cash flow.
I think we are all also aware of what happens when our outstanding invoices don’t resolve into income as expected. At best this costs time and money in chasing and credit control, and at worst it can cause severe cash flow and even long term financial issues.
When an invoice goes to the outstanding stage it is usually because of one of three reasons:
- The client cannot or will not pay
- The client has a query on the invoice
- The client has not paid through a mistake, or his or her own bad accounting practices.
Looking at your internal culture of collection may help. Let me pose a question at this point. Do you have a culture of collection that is respected by your customers and your staff? By which I mean, how clear is it to your clients what your policy of collection is and does everyone understand and follow through on your policy?
I am not talking about the terms and conditions on your invoices here, but the culture that surrounds payment. Try the following test; if you answer yes to any of these questions then you may need to install a stricter culture of collection.
- Do you have any outstanding invoices that have not been resolved within one business week?
- Do you have any customers that always pay in the end so you don’t bother to chase them?
- Do you have any customers that dictate terms of payment (this is common with local authorities or bigger corporations for example) yet still go outside them?
Assuming that you have one of the above on your books why not try a campaign of collection culture awareness? Here are some suggestions.
- All businesses understand the need to have their invoices paid. Start by sending an email to all your customers in which you politely explain that you are tightening up on your collection policy. Now add an extra paragraph for those clients with a history of being late payers and again very politely state that they occasionally are a little slow, so please note that you will be being much firmer on this from now on.
- That nice chap who always pays when he gets round to it is a problem. He is costing you money. Talk to him and explain you can’t allow it to continue even though he is a really nice customer. Again, he will understand and while this will not stop him doing it, chasing becomes easier because it is now his problem as well.
- Install a reminder system where you send a polite email a few days before the account is going over due, thanking them for their custom and telling them the due dates for the next few invoices. It may also result in a few early payments.
- Limit the number of accounts with variable payment terms – the more you homogenise your payment terms the better.
- Contacts and second contacts. We tend to have one contact that we know will ‘get things done’ but what if they leave or are on holiday? Try to spread your contacts to other staff so there is never a gap in your ability to chase an invoice.
Now install these things as culture in your business. It’s a process of W.A.R. (which means Warn – Advise – Repeat.) You warn your current and future clients of your process, you advise them when the process will happen and you repeat on a regular basis, until it becomes culture for you and for them.