Invoicing is an important part of small business accounting. But the payment process will always be problematic if you don't set up your invoices properly. So what can you do to ensure that invoicing is easy and your customers pay promptly and regularly?
Take the time to invoice properly
There's much more to invoicing than simply sending out requests for payment. The key is to get your invoicing process right from the start.
It’s likely as a small business owner, you’re short on time, with many other elements of your business to set up, maintain and monitor. But making the effort to get the payment process right at the beginning will pay off in the end – literally. When your invoicing process is efficient and pain free, it’s likely that your cashflow will improve.
Develop the right mindset about getting paid
The majority of small business owners have worked as employees in the past, before deciding to set up their own company. The transition from employee to owner is not just practical and financial – it's also psychological. In addition to this, if you’re having to produce invoices, you’ll realize how much time it can take to create and send them.
Employees become used to being paid regularly without having to think about it. The money appears in their bank account or they receive a check on the date it's due. They never have to ask for payment – their pay simply arrives.
But business owners have to proactively chase payments – otherwise, they don’t get paid. And for some people, this can be a difficult adjustment to make. Consciously, you know you’re owed the money. But actually asking for it can feel daunting and stressful.
It’s common for small business owners to initially feel cowed into a feeling of subservience when it comes to asking for payment – particularly in dealings with larger organisations. But the fact is, they have taken your time and/or your product. This means they have a legal and moral duty to pay you according to the agreed terms.
So don't be meek – be polite but firm. Your clients aren’t doing you a favour by paying. They must pay you, no matter how big or small they are.
Keep accurate records of your work
You can't invoice if you don't have accurate records of the work you've done for your customers. Keep track of the time and materials expended on a client's project and make sure you invoice for everything!
Use time-tracking software and time-sheets if you need to record the number of hours or days spent on a project. Be sure to record all Bills of Materials too. Some software will handle this for you.
If you record the work done as you go, it will save you having to remember the details at a later date. It also means you’ll be less likely to forget to include something in your invoice.
It’s common for small business owners to initially feel cowed into a feeling of subservience when it comes to asking for payment.
Work out how regularly you want to invoice
Should you invoice regular clients on a monthly, biweekly or weekly basis? It might depend on the type of work being done. For example, services contract work could be invoiced on a weekly basis, while a manufacturing project may be invoiced biweekly or monthly. This is something to negotiate with your client.
However, be wary if a client insists on an invoicing interval longer than than a month. Unless the circumstances clearly justify it, that may mean they have cashflow issues.
Work out what your accepted payment methods will be
While some payment methods mean extra fees for your business, you should balance the costs against the ease of payment for your customers.
As a general rule, when you make it easier for your customers to pay, it will encourage them to pay sooner – and that’s always a good outcome. For example, some accounting software will add a ‘Pay now’ option to online invoices if you’ve integrated a payment service like PayPal. This means that you can send customers invoices online with the option of getting paid instantly.
It's possible to differentiate yourself further by accepting new crypto-currencies like Bitcoin and other alternative methods of internet money transfer. However, at the moment it seems that many businesses doing this are more interested in the publicity than the practicalities. The exchange rate to 'real' currencies can be wildly variable.
Clearly define your payment terms
Make sure you define your invoice payment terms clearly on all invoices, for example "14 days from date of invoice" or similar. Put the actual due date for payment on the invoice too. Don't leave your clients to calculate when 14 days from February 23rd happens to be.
Don't leave your clients to calculate when 14 days from February 23rd happens to be.
You can remind them of penalties for late payment and let them know exactly how much more it will cost if the payment isn’t on time.
But often a more effective approach, is to offer a small discount for early payment. This sounds more positive and your clients are likely to respond more quickly.
Be human when you invoice
It seems like a small gesture, but often talking to the people in the accounts departments of the companies you're invoicing can make a difference. All it takes is a polite phone call to introduce yourself as the primary contact for payment matters.
A small investment of your time talking to the people who make the payments could prove invaluable to you.
This will often achieve much more than bland emails sent to people who don't know who you are. A small investment of your time talking to the people who make the payments could prove invaluable to you. It may also help smooth out any payment problems that arise in the future, and it might even get you more work.
Invoice as soon as the work is done
It might sound silly, but some companies forget to invoice for smaller jobs due to the pressure of work and being short on time. They may also leave it for months and then start going through their records to check what they're owed.
This is an inefficient way to run a business because it damages cashflow and reduces revenue from work that's already been completed.
Also, if the invoice date drifts too far from the work that was carried out, your client may have some awkward accounts reconciliation to do. This is because the two events may fall into different tax years. So always invoice promptly, or as soon as the agreed work has been completed.
Invoicing should become a fundamental part of your business operations. Some accounting software will schedule invoices automatically for you, and even create and print them or email them to your clients.
Be taken seriously and create professional-looking invoices
At its most basic, an invoice is a written demand for payment. In theory it could contain nothing more than your company's name and address and the amount owed. In practice you should include much more information than that if you want your business to be taken seriously.
10 items to include on your invoice
- Full names and address
Your full company name and address and your client's full company name and address.
- Invoice date and reference numbers
The date of the invoice and your invoice number or unique reference number for the work you've carried out. Ask for this to be used for payments, so you can reconcile accounts easily. You also need to include your customer's job number, purchase order number, sales order number or other reference, so they know exactly what they're being invoiced for.
- The name of the person responsible for processing the invoice
This might not be the person you deal with on a work basis. A common mistake is to address invoices to the wrong person, which can delay payment.
- An entry for sales taxes
In most cases, enter a separate entry for sales taxes which you must account for and pay to the government. Professional accounting software will handle this for you automatically, and also keep track of these payments and receipts so that you can fill in your return for the tax office.
- Legal requirements
These will vary from country to country and state to state, so check the law that applies and make sure you include everything they specify. You may need to include details such as the names of all the company's directors, the company registration number, the company's sales tax number and the registered company address (which may not be the same as the trading address).
Include any discounts you've agreed with the customer.
- Cost details
Add a column showing:
- details of the number of items or hours/days chargeable.
- the cost per item or hour/day, aligned with the above entries.
- the total amount for each entry, with an overall total at the bottom.
- The invoice total
The grand total payable including sales taxes and discounts.
- The invoice due date
The date that you need payment by. Make sure this is very clear.
- The payment methods you accept
Payment methods, including your bank account details, and payment terms.
Good quality accounting software will have templates to help you to generate invoices with all the necessary information. This is an advantage because you won't need any design or layout skills to produce professional-looking well-designed invoices.
Keep track of late payers
Once invoices have been issued, keep track of who's paid and who hasn't. Chase the ones who haven't, though again it's usually best to do this politely.
Good accounting software can provide ageing reports that will break down what you're owed in order of age of invoice, showing you at a glance who owes you money and how much. It may also let you send emails to the slowest payers, so you can remind them of your payment terms and the due date. Some accounting software will also show you when your customer opened the invoice online. Customers won’t be able to pretend they haven’t received your invoice when you can see they opened it weeks ago!
Some accounting software will also show you when your customer opened the invoice online.
Break down large jobs into smaller invoices
If you're working on a project that involves a significant amount of your company's time and/or expenditure in materials costs, it's worth invoicing in chunks. As an example, you could do one-third up-front, one-third halfway through the job and one-third on completion.
You can negotiate with your client to decide on deposit and balance payments that suit you both. That way, if your customer runs into financial problems part way through the project, you won't lose everything they owe you, or all the time and money you've spent doing the work.
Invoice foreign companies correctly
Your business may have clients in other countries. And even if your client's office is in the same country as you, their bank might not be, especially if they're a multinational corporation. Standard bank account numbers are designed to allow bank transfers within the same country, so they won't work for transfers between banks in two different countries.
For that you'll need internationally valid account numbers such as IBAN, BIC or SWIFT codes. Your bank will be able to tell you which of these codes to use for your business account. Make sure you include them on your invoices.
Choose the right currency to invoice in
You might find that a complex aspect of invoicing foreign companies is deciding which currency to use. Usually you would decide this as part of contract negotiations with a new client. The most important things to consider are bank charges and exchange rate fluctuations.
Banks charge fees to send money in different currencies, and their exchange rates are rarely the best available. So your client may end up paying twice – once for the bank fee, once via the exchange rate. You may decide, as part of your contract with that client, to share the costs out of goodwill or agree to use a currency exchange firm. However, you should take financial advice first.
Good accounting software will allow you to account for invoice payments in multiple currencies and to/from different countries. It will also allow the application of sales taxes which are often zero-rated or low-rated for foreign clients, but must still be accounted for in your records.
Get the process humming, and you’ll get paid faster
This might all seem like a lot to think about. But once your invoicing process is properly set up, it should run smoothly and without too much intervention.
A combination of the right attitude, processes and accounting software will help you to invoice your clients properly, and encourage them to pay you on time.