Billing, Collections and Payments

Many businesses struggle not because they can’t generate sales, but because they don’t manage cash. There is nothing more important to the success of your business than your system for managing cash due from sales through your process of billing and collections. You can have lots of customers, but if you don’t collect money from them, you will go out of business.

“Many businesses struggle not because they can’t generate sales, but because they don’t manage cash.” 

For your business to get paid efficiently, you need to establish several things.

• Payment Methods
• Payment Terms
• Billing
• Collections

We outline each of these here. Before you sign on your first customer, you need to have established your policies and procedures for these items. This policy should cover your credit policies, accepted methods of payment, interest charges, etc. You should also establish clear billing policies, including billing terms and billing frequency.

Establish Payment Methods

How will people pay you? This depends primarily on the type of business and whether your customers are individuals or companies or both. There are some established ways to take in money from customers of all types:

• Cash. Cash payment such as from individuals in a retail business
• Checks. Checks from individuals and business customers
• Credit/Debit Cards. Credit and debit card payments from individuals and businesses
• PayPal. Online payment methods such as PayPal, from individuals and businesses.

The more different types of payments you accept, the more helpful it will be for customers. But you will have to pay a premium for handling some types of payments, such as credit and debit cards (which take 1-4 percent of each transaction).

Payment Terms

Payment terms refer to if you require customers to pay at the moment they interact with you (e.g., make a purchase or sign a contract) or are given a period of time to pay. This is sometimes also called “extending credit.” You should set standard payment terms that appear on all invoices and are reflected in all contracts. Before starting on any work for a client, both you and the client should agree on payment terms. Here are some common payment terms:

• Extending Credit – Offering Payment Terms.In most cases there’s no need to extend credit to consumers unless you deliver a service that is delivered over time. However, in the case of business-to-business sales, commercial clients will want some type of credit that lets them pay over time.
  • Payment Time. It is common to allow payment 30 days after you bill or invoice them. Larger companies will try to push this out to 60, 90 or sometimes 120 days after delivery of the product or completion of the service for large companies. Obviously the longer you give them to pay, the longer you don’t have that cash. Ideally, you want to be paid as quickly as possible, but 30 days is standard.
  • Do a Credit Check. If you are extending credit, conduct a credit check first, especially when large sums of money are at stake. There are three major credit-reporting agencies serving the United States and Canada: TransUnion, Equifax and Experian.
  • Use Date of Invoice and Not Date of Receipt. Payment terms are measured from a “date”. That date is typically either the date on the invoice, the date you send the invoice or the date your customer receives the invoice. Your policy should be based on the date of the invoice (which is the earliest of those three options). That being said, try to use an electronic delivery of invoices discussed below) so that the date of the invoice is essentially the same as the date it is received.
• Upfront Payments. Whenever possible, receive payments in advance for work to be performed.
• Secure Deposits. If you cannot receive upfront payment, you may be able to secure a deposit in advance of providing your product or service that is applied to any outstanding balance. Try to get a deposit of at least one third of the total cost of the product or service. For example, if you were building a house or delivering custom software, you would not want to start working until you received some payment.
• Progress Payments. Progress payments are also a way to ensure that you do not leave yourself open to financial risk. You receive payments at various stages of the project (e.g., 25 percent on contract signing, 25 percent upon delivery of a milestone, 25 percent upon substantial completion, and the balance at completion).
• Set Up Early Payment Incentives & Late Payment Penalties. Incent your customers to pay their invoice on agreed upon terms by offering a 10% discount on the invoice. If your incentive policy isn’t working out as planned, you can also implement a late payment fee as a deterrent for your customer.

Outline each of these payment terms and make sure they are incorporated into your legal agreements.

Billing

Billing quickly and efficiently is a key component to improving your cash collections. A well-structured billing process with some of the following aids in your collection efforts. Consider the following:

• Set a Process. Set a process that has billing occur at a set time with all necessary internal supporting and approval processes. Add these reminders to a calendar so that it happens on a consistent basis. This often often occurs at a regular interval, such as right after the end of the month.
• Billing as Close to of Period End as Possible. The sooner you send out your invoice, the quicker you’ll get paid. The invoice should go out immediately following the completion of a project or a period.
• Automatic Billing. All current accounting software has automatic billing functions and can also schedule the distribution of bills. This is a great way to make your process efficient.
• Bill Electronically. Many companies are set up to receive and pay bills electronically. This eliminates the risk and time of the mail.
• Recurring Billing. Setting up billing to be at a regular recurring cycle (e.g., on the 15th day of each month) improves your billing process.
• Billing Prior to the Upcoming Month. If you bill a standard amount each period (i.e., $50 per month) some customers will be willing to pay prior to or during the middle of a month as opposed to at the end.
• Bi-Monthly Billing. Increase the frequency of billing from once a month to twice a month. This is more work but means that you aren’t waiting a full month to receive payment.
• Clear and Correct Invoices.Ensuring that invoices are clear, correct and have the right amount of detail sounds basic but is often overlooked.
  • Directions. Your business name, where to direct the payment, and contact information for billing questions.
  • Proper Addresses and Information. Double-check that you’re sending the bill to the right address (physical or email). Sending the bill to the wrong location delays the payment process.
  • Itemize All Invoices. If you have a vague or broad invoice, the client may be inclined to question the charges. Stay ahead of this by providing detailed descriptions of the services or products that are included in the bill.
• Send Bills to the Right Person. Make sure that you’re sending the invoice to right individual. Just because you were hired by a client doesn’t mean that they’ll be the individual paying you. Usually, they have an in-house accountant or have outsourced billing elsewhere.
• Make Invoices Easy to Track. Using invoicing software tracks invoices since each invoice includes a unique number after it’s been created and sent. This allows you to easily locate the invoice if it hasn’t been paid or if you get audited.

Billing efficiently is a key step to maximizing your cash collections.

Collections

So now you have set up your payment terms and have an efficient billing process in place. But if your customers aren’t paying you, that’s a serious cash flow problem. And if they’re slow to pay, that’s a problem as well. While late invoices are fairly common for many businesses, that doesn’t mean you can’t fight it. The key is process. There are a few steps you can take to improve your collection process to expedite payments and maintain control over your cash flow.

• Know Your Accounts Receivable Status. When you bill a customer, and they still owe you, it’s called an “Accounts Receivable.” Every accounting software provide summary and detail Accounts Receivable reports to see exactly where you are in your collection process including customer, amounts due, days outstanding and payment history.
• Establish Process.Establish a regular process for collections that includes:
  • Regular meeting for reviewing accounts receivable
  • Accountability for collections
  • Regular reports that detail current status (such as an “Accounts Receivable” report which is available from any accounting software)
  • Set process for follow-up with customers including timing (how often you follow-up) and medium (how you reach out)
• Set Metrics for Collections. Set amounts and numbers of days outstanding as goals for the individual responsible. For example, if your payment terms are net 30, you might set 70 percent collected within 40 days as a goal.
• Delegate Invoice Collection to One Person with Experience. Collections are best done as a matter of course by the person responsible for the billing. And if they have any experience in this area, they are familiar with the way to improve collections.
• Maintain the Relationship with Accounts Payable. Your client facing personnel (i.e., salespeople and account managers) have relationships with client business personnel and not with the one who controls the purse strings: the accounts payable (AP) person. Establish contact with this persona and build this relationship. You want to be able to call them and discuss their payment status.
• Process for Client Interactions. Establish a set process for interactions with clients. So let’s say that a client has payment terms of 30 days (i.e., they have 30 days to pay.) Create a process such as:
  • 5 Days Prior to Due Date. Email reminder to payables person from the client of the date when the invoice is due.
  • Due Date. Email reminder to payables person from the client on date invoice is due.
  • 5 Days Past Due Date. Call and e-mail to payables person from the client with a reminder that invoice is due.
  • 10 Days Past Due. Call reminder to payables person from the client and an e-mail to your business contact that invoice is due to accounts payable.
  • Every 5 Days. Follow-up call to business person and accounts payable.
  • 60 to 90 Days Past Due. Send to a collection agency.
• Proactively Manage your Accounts. Your accounts receivable process should include a regular review of accounts. This will help you to identify and manage aging accounts, those that are past due. Have a system in place to deal with those accounts that are 30, 60, 90, or more days past due.
• Use a collection agency. Some people believe in going to debt collection after 90 days. There are pros and cons to this. Before using a debt collection agency, you want to make sure you understand the associated costs—both the financial costs and costs to your customer relations. That said, the longer a bill goes without paying, the less chance you have of it ever being paid.

Your collection process is an essential piece of your financial equation. If you don’t keep up with your receivables, you’re putting your business at risk. An established and consistent collection process will help you to avoid a cash-flow situation..