Money is an uncomfortable topic for many people. We’re conditioned from an early age that it’s not something that you discuss with anyone. This can be a tough hurdle to get over even when you’re running a business.
This can be especially tough when dealing with customers that are not paying their invoices by the due date. Discussing a late payment is not a comfortable conversation to have, but it is absolutely necessary.
From a cash flow perspective, it’s always easiest to receive payment at the time the customer receives the goods or services. However, this is not always possible depending on your industry.
Here are some tips to help you manage your accounts receivable and get paid on time.
Know your DSO
Late payments cost you money.
Customers that don’t pay their invoices on time affect your cash flow. If you don’t have the money coming in that you expected, you may have to pull money from other sources to pay your bills. It may even cause you to be late on your own payments, or incur interest fees from the bank.
To manage the costs of late payments to your business, you need to determine your DSO (daily sales outstanding). DSO is just the average number of days it takes for you to get paid from the day the invoice is issued. You want to see a low number here. Every extra day that you don’t have that money in your hand is a day that you may be incurring unnecessary costs.
Use this number as a baseline to compare invoice payments. If the number is going down, then you are doing the right things to reduce the cost of managing. If it’s going up, then something is going wrong and you better figure out what ASAP.
Train your customers to pay on-time
Be very clear with your expectations up front. If at all possible, set up automatic payments so you and your customer don’t have to stress about missing a payment.
The best way to train your customer is to simply be honest about what you expect from them. Build your relationships so they want to keep doing business with you and are willing to be open with you if they do run into any issues with making payments on time.
A big part of getting your customers to pay on time is to make sure that you are invoicing them on time. Switching to a cloud-based model eliminates the extra days caused by snail-mailing invoices and payments. Be diligent in sending out your invoices promptly to set the customer up for success.
Advantageous terms
Everyone loves a deal. A great way to get your customers to pay on time is to offer tempting terms that encourages them to pay early.
For example, if your invoices are normally due in 30 days, you can offer a 3% discount if they pay within 10 days.
What those terms look like is up to you and the specifics of your business. This discount needs to be large enough to be tempting to your customers, but also not be so large that it causes cash-flow problems for you.
Charge fees for late payments
This tip goes hand-in-hand with the one above. You can encourage your customers to pay early with special terms, while also discouraging late payments by charging a fee or interest.
This late payment fee tells your customers that you expect to be paid on time and there are penalties if invoices aren’t paid by the due date. This is a common practice throughout many industries and should not come as a shock to anyone; however, be sure to be clear on this fee up-front so there are no surprises.
This fee can absolutely be waived at your discretion. If you have a customer who normally pays on time and just misses an invoice one month, then take that into account.
Any late invoices should prompt a phone call (not email) where you or a designated employee can determine if the fee will be charged or not. I find it’s easier if there are guidelines already outlined for yourself, but you do you.
Accounts receivable can be a headache for any business owner, but there are ways to help reduce the cost of management. You can increase your chances of getting full payment every time by employing some of these tips in your business.
Need help managing your accounts receivable? Still Waters Bookkeeping can help you avoid the hassle and get paid on time. Contact me today to see if a virtual bookkeeper is right for you!