Many small businesses indeed fail, but the blame doesn’t entirely lay with their owners. According to a study published by U.S. Bank, small businesses are owed an estimated $825 billion in unpaid invoices. That same study also showed that 82% of companies fail due to poor cash flow management.
If you’re a small business owner, getting paid on time is essential to your financial health and success. How can you avoid the pitfalls that come from outstanding and past due invoices? This article offers tips that can help you get paid on time and keep your business running smoothly.
Outstanding invoice vs. past due invoices
While the terms are related, it’s important to understand that an outstanding invoice is not necessarily the same as a past due invoice. An outstanding invoice refers to an invoice that has been sent to a client who has not yet paid their balance.
An outstanding invoice only becomes a past due invoice after the payment due date. This distinction is why it’s important to keep track of your invoices. If you do, you’ll be alerted to customers who have exceeded their due date.
How to get paid quickly
The best way to prevent your outstanding invoices from becoming overdue is to get paid as soon as possible. While you don’t have control over how your customers respond to your invoices, there are some strategies you can use to get paid promptly.
Find the right point of contact
If your customer is a sole proprietor, then you’ll be dealing with them directly. But in larger organizations, your client may have a staff member in charge of billing and payments. You’ll want to send your invoice to the company’s accounting department to ensure that the right person receives your invoice.
Getting paid on time starts with sending an invoice on time. Remember, an invoice is nothing more than a payment request. You’ll want to send the invoice to your customers immediately after you have delivered your goods or your services are complete. A late invoice might be ignored by your clients, who may no longer view you as a priority.
Offer a variety of payment methods
You can reduce your outstanding invoices and ensure timely payment by offering your customers various payment options. Your client may prefer to pay by cash, credit card, check, or a digital payment solution such as PayPal. Having the ability to receive payment from these varied sources increases the likelihood that your clients will pay shortly after receiving your invoice.
Rely on invoicing software
Your entire payment collection process can be streamlined using the latest invoice software. At Invoice2go, a Bill.com company, we offer digital solutions that allow you to create customized invoices and send them to your clients right from your smartphone. These invoice templates can be adapted to include your unique company logo and give your business a more professional look.
The Invoice2go app will remind your customer that payment is due and send notifications to remind them to submit payment. The software connects directly to your business bank account, ensuring that every payment is available as soon as possible.
This software will also create a unique invoice number to be integrated with the customer’s existing accounting department and streamline its procurement process. Best of all, it can improve your accounting process, saving you time and optimizing your cash flow.
Set up automated or recurring payments
If you perform regular service for a customer, it could be wise to set up automated or recurring payments. This solution essentially establishes a subscription option that allows clients to keep their accounts paid in full for your regular service.
An automated invoicing system is ideal for those who perform a recurring service for their customers, such as writers and other freelancers. If used properly, it can avoid overdue payments altogether.
Request a deposit before you begin
Keep in mind that an invoice can be sent before the job is completed. If you sell a large number of goods or perform work on a big project, it’s perfectly appropriate to request a down payment before you begin.
Granted, this doesn’t guarantee that your later invoices will be paid promptly, but an upfront deposit could minimize the risk of late payments (or unpaid invoices) down the road.
Establish a due date
Communication is key. Establishing a clear payment due date is essential, and you must communicate it to the client. Not only should you write this due date on your invoice, but you should also share it with your customer before you agree to provide your products or services.
What is a reasonable due date? Some companies prefer saying things like “due upon receipt” or even “due 15 days from receipt” to encourage immediate payment. But this isn’t always specific enough for some customers, who may just add your invoice to their stack of bills.
Instead, try to be clear with a specific calendar date. This clarity will not only give your customer an exact target date but will also firmly establish when payments are past due. This delineation can be particularly important if your business charges late fees.
Charge a late fee
Don’t be afraid to charge your customers a late fee for past-due invoices. The actual amount of this fee is up to you, but many companies charge 10% to 15% every week that the invoice goes unpaid. Establishing penalties for late payment can motivate your customers to pay immediately, lest they incur these additional fees.
As with your due date, you should discuss any penalties for late payment with your client upfront before you sell them your product or services. This way there can be no question about the expectations regarding late fees, and you can ensure that your accounts stay up to date.
Send a reminder
If a week goes by and your customer has yet to pay their invoice, consider emailing a polite, professional reminder that the invoice has been sent. You can include a message to your customer (or their accounting department) that reminds them of the cost of your goods or services, the invoice number, and the date by which you expect them to pay you.
Depending on your due date, you may wish to send more than one reminder. Again, this is where an automated system can be helpful, as it can automatically send a reminder about outstanding invoices directly to your clients.
In some cases, it may be beneficial to follow up with a phone call
If you charge a late fee, you may give a polite reminder of the penalties for late payment. You may also request payment or ask when they or their company intends to pay you.
Some companies make a habit of ignoring their invoices and only paying their vendors once they receive a second or third notice. They use the notices to prioritize which vendors receive payment, which can help manage cash flow.
In other cases, a company may be so busy that your invoice gets lost in the shuffle. In either case, a quick call can encourage them to settle their accounts and pay their bill quickly.
Once an outstanding invoice is past due, giving your client another call is also helpful. Again, you can remind them of any additional charges for overdue payments and, ideally, arrange for payment to be made as soon as possible. Accepting credit card payments, for example, can ensure that you receive payment immediately.
What to do when your client doesn’t pay you
The tips offered thus far are designed to help you with your outstanding invoices. But what do you do if your client won’t pay you? Unpaid invoices can quickly become an accounting nightmare, create problems for your company’s cash flow, and disrupt the balance statement of your business. What can you do when your clients don’t keep their accounts paid in full?
If your business performs regular work for a client, immediately cease providing that service until the past due invoices have been satisfactorily resolved. At the very least this will prevent you from wasting your inventory or talents on a customer who won’t pay their debt.
Once your customer settles their account, you can choose whether to take the risk of working with them again in the future.
Contact your client (again)
Collecting the money from past due invoices can be a challenge, but if you pursue other legal or tax options, you’ll first need to demonstrate that you’ve exhausted all other avenues for collecting payment.
Always keep track of all communication you send to or receive from the company, particularly the dates and times you indicated that their payment was past due. Even if this now seems futile, it may be important later on.
You now have a decision to make: Should you pursue legal options to get your money from your overdue invoice? For some business owners, the legal fees are cost-prohibitive, and there may be less risk in ignoring the money you’re owed than in taking on additional debt by hiring a lawyer. But if you can find legal representation at a low cost, this could be an option.
Keep in mind that every state has different standards for small-claims court, and this option is typically reserved for amounts under $10,000. You’ll need to check your state’s regulations for more details on the specific requirements.
Alternatively, you can write off an unpaid invoice from your income taxes. The IRS classifies unpaid invoices as “bad debt” on your income taxes. You can deduct the value of these overdue invoices from your income and lower the amount of taxes that your business owes.
Keep in mind that to qualify for this deduction, you may need to demonstrate that you’ve made reasonable efforts to collect the overdue payment. And what if you did not specify a payment deadline? In that case, you will not be able to subtract the value of outstanding invoices from your income taxes since an outstanding invoice is not technically overdue.
The inadmissibility of outstanding invoices as bad debts for write-off purposes is one reason that it’s incredibly important to include a due-by date on every invoice that you issue. If you don’t, you give up your last recourse when it comes to negating the loss.
Change the way you invoice
Thankfully, some tools make it easier to send and process invoices. At Invoice2go, we’ve helped countless companies streamline their invoicing process, and our innovative tools can minimize your number of outstanding invoices and ensure that you get paid on time.
Frequently asked questions
We understand that you may still have questions about outstanding invoices. Following are some of the most common questions we hear:
The short answer is yes. Pending payments refer to the state of a payment. Pending payments have not yet been made, which is functionally the same as an outstanding payment. “Outstanding payment” may be used interchangeably with “outstanding invoice,” though one refers to an official document while the other refers to the state of a payment.
No. Outstanding invoices are simply those that a customer or business has not paid. Outstanding invoices only become overdue once they pass the specified date by which payment is due.
service and the amount you charge, but an invoice uniquely includes additional information related to the sale, such as payment deadlines and payment options.