In the ever-evolving landscape of small business management, one thing is sure: cash flow is king.
For small businesses, timely payments are the lifeblood that keeps the business thriving (if not just surviving). Accounts receivable management is all about balancing getting paid with maintaining customer relationships.
But the following up on unpaid invoices can be a frustrating and uncomfortable task.
The good news is that, with the right approaches and processes, you can improve your debt collection practices. This will save you time and stress and keep your customer relationships healthy.
In this article, we cover our top tips to help you get better at managing your accounts receivable. If you follow these tips to you can build a healthier cash flow and more stable financial future for your business.
Clear and Consistent Terms and Policies
Establishing crystal-clear payment terms and policies is essential for small businesses. These terms set the expectations for both you and your customers from the beginning. Have your customers read and agreed to your terms and conditions (in writing). This will make sure they are aware of their financial responsibilities and minimise disputes down the track.
Payment terms and conditions should include:
- When invoices will be sent
- Standard due dates/timeframes for payments
- Accepted methods of payment
- Options for any flexible payment arrangements (e.g. instalments)
- Late payment penalties
- Interest charges for overdue payments
- Liability for costs incurred in engaging third party debt collectors
Your terms and conditions should be stated clearly, with no ambiguity or room for misunderstanding. To ensure your customers are well informed and reminded of their commitment, provide your T&Cs via your quotes, contracts, invoices and on your website.
Charge an Upfront Deposit for All Jobs
Charging an upfront deposit is standard practice in many industries, especially for larger jobs. Securing an initial payment helps with immediate cash flow. But it also reduces the risk of non-payment or late payment once the job is complete.
You can also apply upfront payments to smaller jobs. For example, many trades will charge an inspection fee or quote fee. The fee is then often deducted from the final price of the job.
The other benefit of charging an upfront fee is that you have established a financial relationship with the customer, and they have made a financial commitment to you. This makes them more likely to pay in the future. Plus, you now have their payment details on record which can make it easier to process future payments or follow up if there are issues down the track.
Keep Your Books Up To Date
Accurate and up to date records are the cornerstone of healthy business financials – especially accounts receivable! Ensuring that invoices are sent at the right time, to the right people, and with the right information will minimise the chance of disputes and delays.
The following practices will help your customers pay on time:
Invoice promptly after providing the service or product
Ensure invoices include the agreed payment terms
Provide clear instructions for how to make payments
Check that any deposits or partial payments have been correctly accounted for
Send to the right person or email address for prompt payment
Update customer details when anything changes (i.e. contact info or payment terms)
Follow Up Frequently
The likelihood of successfully collecting an outstanding debt declines rapidly after the first few weeks. So it’s in your best interests to implement a structured process for following up on payments as soon as they become overdue.
For example, if your payment terms are seven days after the invoice has been issued, this would be a recommended timeframe for following up on unpaid amounts:
- 14 days after invoice issued – send a reminder email
- 21 days after invoice issued – follow up via phone and email
- 30 days after invoice issued – engage a debt collection agency
Sometimes a gentle reminder is all that is needed because people have forgotten, or an invoice has been lost. Start with gentle nudges and gradually escalate as time goes on. The key is to stay professional and respectful when communicating with your debtors. Remember, your goal is to recover your funds without harming your customer relationships.
Reaching out quickly and directly can also help identify the reason for the missed payment, so you can manage it accordingly. The customer may have a concern about the service or product provided. Following up gives you the opportunity to resolve any concerns before they escalate into conflict. Or they may be suffering from financial hardship, so you might offer and extension or flexible payment terms.
Use Software to do the Legwork
Accounting software can save you a lot of time and stress when it comes to managing invoicing and payment collection. Software can streamline the entire workflow, doing a lot of the admin for you, like:
- creating and sending invoices
- tracking payments
- assigning payments to income categories
- sending reminders for overdue accounts.
All the major software platforms offer automation that can send payment reminders at pre-set intervals, helping to reduce the burden on you and your team to track and follow up on invoices.
They also provide real-time insights and reports for outstanding balances and customer payment histories. This makes it easier for you to make informed decisions when it comes to extending credit or negotiating payment plans.
Not sure how to use your software to generate the reports you need? Get in touch with the Dream Team today – we can help!
The important thing to remember is that, for the software to be most effective, you need to be regularly reconciling your bank transactions with your invoices. If you aren’t marking payments as received and linking them to the relevant invoice when they come in, you risk the software sending out reminders for payments already made – which can be a bit awkward.
Outsource to a Third-Party Debt Collector
When you feel you have taken reasonable steps to recover the payment yourself, but are making no progress, it’s time to bring in a debt collection agency.
Now don’t go thinking this means two big thugs with baseball bats knocking on your customer’s door, ready to take their TV away as payment!
Not all debt collectors fit the Hollywood stereotype. Here at Dream Admin, we also have our own internal debt collection agency – Pink Door Collections! We approach debt collection differently, ensuring we treat every debt with respect and kindness. Our aim is to form a relationship with your debtor, so we can understand why they haven’t paid. And then we can find solutions that work for both parties.
Using a third-party debt collector offers many benefits:
- access to specialised skills in negotiation and knowledge of the relevant laws
- higher recovery rates than chasing it on your own
- preserving customer relationships by removing the direct interaction between business and customer
- let’s you and your staff get back ‘on the tools’.
Remember, ‘fresh’ debts have a higher rate of payment – so don’t wait too long before engaging a collection agency.
When all options have been exhausted, the final pathway is to take legal action. The courts will require evidence that all reasonable attempts have been made to recover the debt or resolve the conflict. Following these tips will help you implement a systemised process that will hopefully avoid the need for legal action. But in the worst case, having taken the steps we recommend above will also support your claim.
If you need help with your debt recovery, here at Dream Admin and Pink Door Collections we have a special team dedicated to recouping owed funds. Pink Door Collections will recover your unpaid invoices quickly and respectfully.
Get in touch for a confidential discussion today.
