As a business owner, one of the most frustrating things to see at the end of the fiscal month is a heap of outstanding invoices — second only to the act of chasing an outstanding invoice.
Outstanding invoices can cause all sorts of trouble for a small-to-medium enterprise. Too many and it’s possible that your business might have a problem balancing its budget on time. This could lead to a number of potential headaches for the company.
Chasing outstanding invoices can be a huge waste of time for any company. The act of calling a client, following up and sending an assortment of back-and-forth emails can take hours and even days before you’re finally paid back.
If your company is planning to borrow money using a cash flow statement, any unpaid invoices can severely hurt your chances at getting the funds that you need. For companies that are hoping to supplement their cash with invoice financing, your application may be rejected for the very same reason.
Dealing with late invoice payments isn’t an uncommon problem. A study conducted by National Australia Bank found that more than half of all invoices issued by small businesses to large businesses are paid late, totalling about $115 billion altogether.
It’s time to finally get the money that you’re owed — on time. Find out how to best chase outstanding invoices with our guide and make sure that you’re paid on time.
What is an invoice?
An invoice is a document that is used to convey the amount of money that a client owes a business.
Invoices generally state and outline what exactly was purchased, the total amount that is owed and when it is owed by. These documents are formal requests from a business that remind a client to pay them back by a certain date.
The term “bill” can be used to refer to the same item, but it is used more on the customer’s side.
There are quite a few types of invoices that a business can issue to its client. Some of the most common types of invoices are:
- Standard invoice
- A standard invoice is just that — a quick delineation of the goods exchanged and a line-by-line itemisation of everything that a client owes the company. Plain and simple.
- Did you know that not all invoices have to be physical documents? In the digital era, e-invoices have become more and more of a popular option, replacing standard invoices in some cases to better accommodate a company’s workflow and organisation system. These provide the same type of information as a standard invoice with the added bonus of being virtual.
- Debit invoice
- The amount that needs to be paid on an invoice isn’t always set in stone. A debit invoice is a follow-up invoice that adjusts the amount a client owes a business in the case of any additional fees that may spring up. For example, if a client hires a company for four hours of work but it ends up taking much longer, a debit invoice will likely be headed in the client’s way.
- Recurring invoice
- If there’s a consistent amount that a client pays a business every month, a business may opt to send a recurring invoice instead of creating a brand new one every payment cycle.
- Past due invoice
- The past due invoice is perhaps the most important one in the context of this article. These are sent when a client has failed to pay the agreed upon amount by a certain date. Past due invoices are used to spell out any late fees or interest charges that may result from any late payments.
These are only a few of the many types of invoices that you may come across. Because there are so many different forms that invoices take, it may be difficult to keep track of them all — which may lead to trouble when it comes time to collect any payments. Keeping detailed financial records is crucial for any organisation.
What causes unpaid invoices?
One of the most common reasons why a client may be late paying their invoice comes down to a simple cause: forgetfulness.
With everything that may be going on in their place of work, your company’s invoice may accidentally be overlooked in the grand scheme of things. Oftentimes clients don’t have ill malice towards your company and a cursory reminder is enough to get payments back on track.
As we’ve established above, invoicing can come in all different types of formats — meaning it can sometimes be very difficult to keep track of them all.
For a client with a disorganised invoicing system, simply having to juggle physical invoices and e-invoices may lead to unintentionally skipped invoices and late payments.
Client doesn’t understand invoice terms
Sometimes terminology can be tricky. Although it’s used to facilitate an exchange between a business and a client, invoice wording that is too careful can sometimes lead to confusion from the buyer’s end.
If your written invoice becomes too difficult to understand, a client may put off paying it until they get some answers — leading to an unpaid invoice. It’s always a good idea to clarify what exactly the document says before leaving an invoice with a client.
Technologically inept clients
As digitisation becomes more and more prominent in all facets of worklife, clients who may not be as technologically adept as you may struggle to keep their invoices in order.
While the introduction of digital systems is ironically made to streamline operations, the opposite effect may happen for people who are slow to keep up with modern advancements. This could lead to a client unintentionally missing a few deadlines before they get the hang of it.
How to prevent late payments
Perhaps one of the best preventative measures a company can take is to set up a few safeguards before sending your documents over.
Late payment fees
The most popular method that an organisation might use to deter people from late payments is a late fee. Why pay more for a purchase than you already have to?
However, the amount that your company wants to charge on late fees is up to you. Usually, these rates can range from as low as 1% up to 10%. A lot of these situations, however, can vary.
A late fee can protect your company by either ensuring that your client pays on time or, at the very least, reimbursing your company for the time spent waiting for that payment.
Negotiate for upfront payments
If you have a particularly large invoice to settle with a client, it’s not uncommon for a company to ask for a few upfront payments as part of the invoicing terms.
This way, even if the client is late with the payment, your company will still have cash inflow to pay off its monthly dues.
Know who you’re working with
Whenever you open up a new account with a potential client, your company takes a risk because you don’t exactly know what the buyer is like.
It’s always best to get to know who your client is, have an open line of communication and make clear who is the point of contact for paying off invoices at the end of the month.
Use a contract
Although many companies may not opt to write up a contract between their clients and themselves, a contract is a surefire way that your company will be paid back no matter the circumstances.
A contract is a legally binding agreement and you can threaten or start legal proceedings if any dues are not paid on time.
Following up on outstanding invoices
Do you have a client that has an outstanding invoice? Try these tips to encourage them to pay their dues:
Start with email
The first course of action that your company can take when chasing an outstanding invoice is to send a payment reminder via email.
Clients can often be forgetful and accidentally miss a payment. In these cases, send friendly payment reminder emails clarifying the invoice number, the terms of the invoice and its due date. Email is a great way to open up this line of communication because of its record of time stamps and how universal it is. Phone calls can also help.
Most of the time, this will be enough to get that invoice paid off.
Give payment plan options
If your client is having trouble paying off their invoice, perhaps you can open up different types of payment options for them to take.
Giving them the option to pay in installments, for example, can make it easier for struggling clients to pay off their debt. Opening up credit card payments can also prevent clients from paying late.
Hire a debt collector
When the amount of outstanding invoices starts to add up and you’ve tried everything in this article, perhaps it’s time to hire a debt collector.
A debt collector’s job is to chase down these unpaid invoices and make sure that they’re paid off. This way, you won’t have to waste valuable time hunting down your clients and instead focus on the more important aspects of your work.
Too many outstanding invoices? UnLock can help.
If your company is plagued by too many outstanding invoices that threaten to jeopardise your monthly payments, one possible solution is to contact UnLock.
UnLock offers a crucial cash flow service (buy now pay later for business) that provides a reliable workaround for a wide variety of companies that haven’t yet achieved unfettered access to working capital.