Collecting Accounts Receivable:
Be Proactive by Offering Incentives
Getting delinquent customers to pay their bills can be a challenge for small business owners, and if they pay late (or don’t pay at all) it can create a real cash-flow crisis. If you’d rather spend time running your business instead of chasing after overdue invoices, here are some ways you can head off the delinquent-bill problem before it occurs.
Set Yourself Up for Success
- Invest in accounting software. A system like QuickBooks can help you produce invoices quickly and also track receivables.
- Check credit for first-time customers. Unless you’re 100% sure that your customer has a sterling credit record, it’s best to check before extending them credit, which amounts to giving them a short-term loan.
- Make it easy to pay. Provide multiple options like credit cards, PayPal or bank transfers.
- Get invoices out promptly. The sooner you send the bill, the sooner you’ll get paid. If you have an email address for the customer, sending your bill electronically can save you a couple of days over sending it by snail mail.
- Make your terms clear. Make sure your terms are spelled out clearly and featured prominently on your invoices.
If you’re doing a major job with a large price tag, set up a contract that includes payment terms, any incentives offered for paying early, and any penalties for late payment. Then make sure both parties sign the contract.
Many businesses choose to offer an incentive to their customers for paying the invoice before the due date. This is usually in the form of a discount off the invoice total. Why offer a discount? The sooner you get your money from customers, the sooner you can use it to pay your own bills, which may enable you to take advantage of discounts offered by your suppliers. Getting paid early may also give you the cash flow you need to avoid having to draw down on a bank line of credit or charge expenses to a credit card. Giving a 1% discount is bound to be cheaper than the interest rate you’d pay your bank or credit card company.
In addition, the longer you wait to get your money, the greater the risk that something will happen to prevent your customer from paying: equipment that needs costly repairs, a family emergency, lost job, etc.
Check Out Your Competition
Check out what competitors are offering. If they offer discounts, you should probably follow suit in order to be competitive. If they don’t offer discounts, it might present an opportunity to get more business by offering an incentive they don’t have.
On the downside, offering discounts costs money, and if enough customers use them, it can affect your bottom line. That’s why it’s important to plan ahead to make sure the discount you’re offering pencils out. Another possible downside is that the customer may take the discount and then pay you after the discount date, which means you’ll have to contact them about paying the rest of the invoice. This challenge can usually be solved with diplomacy, but if that doesn’t work, it might be better not to sour the relationship for the sake of a small amount of money.
What Are Your Options?
Offering a discount for early payment can take several forms. The most common is taking a percentage off for early payment - for example, offering a discount of 1% or 2% if the invoice is paid within 10 days. Otherwise, the entire amount is due in full within 30 days. If you expect your client to pay within 10 days, it’s especially important to make sure you send invoices out promptly. If 10 days is not an adequate amount of time for your customer to pay their bill, consider offering a discount for paying in full prior to the 30 day grace period.
If you bill the same amount on a monthly subscription basis, you might offer a discount for paying 6 months in advance.
Communication is the key to getting paid promptly. Make sure your terms are clearly spelled out on your invoices, and follow up with the customer to remind them that the grace period for the discount is ending. You might do this by sending out an email and attaching a copy of the bill for their convenience. In addition to increasing the chance that they’ll pay early, it also lessens the chance that they’ll pay late and still take the discount, since you’d have a record of reminding them about the schedule.
Cash flow is the lifeblood of any businesses, so make sure yours flows smoothly and consistently by incentivising your customers to remit payment promptly.