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 huge impact on your cash position. Not recovering money is probably the biggest 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.

How you do your business invoicing is as important as when you do it.

If it’s hand written on scrappy paper, it is likely to be treated casually by customers. If it looks professional and contains all the details, it is more likely to be treated seriously.

One of the most important 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 are likely to 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 like 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 methods of payment 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 goods that are unpaid for.

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

In my next article I will discuss recovering money and how to speed up payment from customers.

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 business safely.

8 comments | Add your own 1 2 | Next» View all»

I read recently about 1 big organisation that had $1.4 billion in stock and $4.3 billion in creditors. Why pay bank fees when you can get your suppliers to act as no-fee lending facilities?
Personally, I'm always happy to accept credit cards and pay the associated costs rather than wait. Grant Hyman from Sydney | Read my articles
What do you think of Remittance Advice portions on the invoice? Some of my clients would not dream of sending invoices out with such a portion however my invoices has not got it. I have received some cheques with a copy of my invoice attached. Shaun Nell from Brisbane, Australia
re Remittance Advice portions
I have them on mine. It depends on how the customer wishes to pay - if they pay electronically, then I usually get an email or fax receipt advice. If someone is using credit card or cheque they usually use the remittance advice. Occasionally a photocopy of the invoice is sent.
As for my own creditors, I email remittance advice whenever possible from direct deposits, or fax a remittance if it's credit card. Karen from Springwood NSW
MYOB recognises that soloists need to collect money, but some methods of payment can be expensive. That is why they introduced M-Powered Invoices which provide you with 5 easy ways to get paid BPAY®, credit card, online, by phone, or at any Australia Post outlet. As at 7th Oct 2007 if you have MYOB Cover, the cost to receive money per payment is; BPAY® - $2.00, credit card - $2.00, online - FREE, by phone - $2.00, or at any Australia Post outlet - $2.50.
If you require more information about M-Powered Services, please contact the M-Powered team on 1300 555 931, or look here http://myob.com/servlet/Satellite?c=Page&;pagename=MYOB/Page/ContentPageWithoutNav&cid=1111637518641. I realise that sounds like a sales spiel. M-Powered Services are so reasonably priced that no-one makes a commission on selling them…not even a MYOB Certified Consultant :)
Heather Smith from Brisbane
Shaun, Of every 100 invoices I have processed, one has been set-out incorrectly for TAX/GST purposes, and payment is stalled, until they send in a correctly formatted invoice. While a Remittance Advice portion on an invoice NOT mandatory, it may cause the accounts payable staff to take a second look at the invoice, before they approve payment. Heather Smith from Brisbane
Yes, MYOB with the M-Powered invoices nailed it.
Regardless of the business I always recommend my clients an accounting software such as MYOB.Having a system where you can check debtors and creditors is vital for cashflow.
Invoicing,following up payments are as important as running your business, without it no cashflow. No cashflow, no money. www.theofficewitch.com.au Judit Nagy, www.theofficewitch.com.au from Sydney

8 comments | Add your own 1 2 | Next» View all»

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