Small business owners are always looking for ways to increase their profits. One way to do this is by collecting outstanding invoices as quickly as possible. However, this can be a challenge for some business owners, especially if they don’t have a lot of experience in collections.
As such, this article will discuss some of the best practices for small business owners in collecting outstanding invoices.
Why Collecting Invoices Can Be Challenging
Before discussing the best practices, it’s essential to understand some of the challenges small business owners face when collecting outstanding invoices. After all, if you don’t know the challenges, it won’t be easy to overcome them.
One of the biggest challenges is that many small business owners don’t have much collection experience, making it difficult to know how to collect outstanding invoices effectively.
Additionally, many small business owners don’t have a dedicated collections department, making it harder to keep track of unpaid invoices and follow up with customers promptly. Furthermore, some small business owners may be hesitant to pursue collections for fear of damaging customer relationships.
Best Practices for Collecting Outstanding Invoices
These challenges can make it difficult for small business owners to collect outstanding invoices promptly. However, some best practices can help.
Have a Clear Collections Policy
One of the best things you can do is have a clear collections policy. Your policy should outline when invoices are due, the late payment terms, and what actions the business will take against customers if they do not pay their invoices on time. A clear collections policy will help ensure that customers know your expectations and will help you stay consistent in your collections efforts.
One way to implement a clear collections policy is to include details on your invoices that state when payment is due and the consequences of late payment. For example, you could include language that says the payment is due within 30 days and that customers should expect a late fee of 10% for invoices not paid within that timeframe.
Additionally, include your collections policy on your website and other customer-facing materials.
Use Technology to Your Advantage
Technology can also help you collect outstanding invoices. Several apps and software programs can help you track invoices, send automatic reminders, and even manage collections. Some of the essential features to look for in these apps include the following:
- The ability to track invoices and payments
- The ability to send automatic payment reminders
- The ability to manage collections along with accounts receivable
- The ability to integrate with accounting software
In particular, payment collection software can automate many collections management tasks, from issuing invoices to following up with customers.
Make It Easy for Customers To Pay
Another best practice is to make it easy for customers to pay, which means providing multiple payment options and making the payment process as simple as possible. For example, customers should be able to pay online, by phone, and in person.
Additionally, consider offering discounts for early payment. For instance, you could offer a 2% discount for invoices paid within ten days.
It would help if you also considered automating your invoicing and payments process with accounting software such as QuickBooks or FreshBooks. Doing this will make it easier for customers to pay invoices and for you to track payments.
Some payment processors offer features that can help you collect outstanding invoices. For example, PayPal’s Merchant Services provides a “Bill Me Later” feature that allows customers to pay invoices over time.
Follow Up Promptly and Consistently
Another best practice is to follow up promptly and consistently with customers who don’t pay their invoices on time. Doing this means having a system for tracking outstanding invoices and following up with customers.
One way to do this is to create a spreadsheet with all your outstanding invoices and the contact information for the customer. Then, set up a system for following up with customers. For example, you could follow up weekly with customers via email or phone until the invoice gets settled.
Some accounting software also offers features that can help you track and follow up on outstanding invoices. For example, QuickBooks allows you to set up automatic payment reminders and late fees.
Consider Hiring a Collections Agency
If you’re having difficulty collecting an outstanding invoice, you may consider hiring a collections agency. A collections agency can help you recover unpaid invoices and can also help you establish a plan for preventing future late payments.
There are some things to keep in mind if you decide to hire a collections agency:
- Research the agency and make sure it’s reputable.
- Be sure to understand the fees associated with collections agencies.
- Make sure you have a clear understanding of your rights and the rights of the collections agency.
Consider Offering Incentives for Early Payment
Another best practice is to offer incentives for early payment. Many customers will pay their invoices early if they receive a discount. For example, you could offer a 2% discount for invoices paid within ten days.
You could also offer other incentives for early payment, such as free shipping or a free product. By providing these incentives, you can encourage customers to pay their invoices on time, thus reducing the number of outstanding invoices. In addition, customers will feel appreciated and more likely to do business with you in the future.
Find the Root Cause of Late Payments
If you’re consistently having difficulty collecting outstanding invoices, it’s essential to find the root cause of the problem. There are many possible causes of late payments, such as poor customer service or a complicated invoicing process. Once you identify the root cause, you can take steps to fix the problem and prevent late payments in the future.
One way to find the root cause of late payments is to ask customers why they’re paying late. You can do this by sending a survey to customers who have paid late or by asking customers during phone calls or face-to-face meetings. By asking customers for their feedback, you can better understand the reasons for late payments and take steps to fix the problem.
Be Understanding and Willing To Negotiate
Finally, it’s essential to be understanding and willing to negotiate with customers who have difficulty paying their invoices. Many customers are eager to work out a payment plan or make other arrangements if they feel that a business is treating them fairly.
It’s also important to remember that situations can change, and customers who cannot pay their invoices today may be able to pay them in the future. Understanding and flexibility can establish good customer relationships and increase the likelihood of collecting outstanding invoices.
Collecting outstanding invoices can be challenging for small business owners, but many best practices can help. In this article, we’ve outlined fifteen ways to manage unpaid invoices effectively. We’ve also discussed the benefits of hiring a collections agency and offered tips on finding the root cause of late payments.
Finally, we’ve provided advice on how to be understanding and willing to negotiate with customers who have difficulty paying their invoices. Implementing these best practices will help you reduce the number of outstanding invoices and improve your cash flow.