I've worked in financial service since I was in college. In fact, my very first job was as a collections agent for a big, evil bank. For four hours a day, five days a week, I'd sit in a call center in suburban Southern California with a fugly headset on, connected to an automatic dialer. I would speak to people who were past due (bank speak for late on making a payment) on their auto loans. The majority of the time the person on the other end of the line just spaced and forgot to make their payment.
The bank had entire department dedicated to closing the gap between revenue that was owed to them (AKA receivables) and cash. The gap is entirely created because of how, when or if a customer will pay their bill or invoice. As a small business owner, you probably experience the drawbacks of this gap like not being able to pay your vendors or yourself or your other bills. But there are things you can do to help minimize the gap. This is called managing your cash inflow.
The easiest way to make sure you don't get screwed by a customer or client is to avoid doing business with them in the first place. Be cautious of potential clients who don't value your work. Listen and observe and if they sound like they don't value the work you do, they might not. And when a client doesn't value your work, they have an easy time not paying. So if it doesn't feel like the right fit because they keep saying, "I just don't think this work is actually worth that much," or "I just don't want to spend that much money (read: because I don't value what you create)" you might want to break it off before it even starts.
If it makes sense to ask for references, ask for references. This isn't something every service provider can ask for, but if you're in manufacturing, you may be able to ask for other suppliers as references to do your due diligence on the potential customer. Find out their payment history with other suppliers and go from there.
Know the Status Quo in Your Industry
Before you create your invoicing terms, you should before familiar with what your industry standards are. If the industry standard is 60 days, can you incentivize your customers to pay earlier by offering a discount?
Is the industry standard to request an initial deposit, then to receive installments for milestones or deliverables? Can you set up the holy grail of invoicing by setting up an automatic payment? Explore the possibilities with the goal in mind of closing the gap between receivables and cash in the bank.
You should have a good understanding of pricing in your industry as well. I'm writing this assuming you've already done the legwork on your pricing strategy, so if you haven't, brush up here.
Communicate the Terms
You must make sure that your payment terms are laid out clearly in your contract or agreement with your clients and customers. Don't be shy, you're doing business after all.
By being up front with the terms, you open up the conversation. Your customer might ask for different terms or for clarification. Having that conversation will allow you to get in front of any issues they might have with your terms; hopefully eliminating any miscommunication down the road.
Even though at first it was awkward asking people for money, the collections job was an easy because it was all an automated system. Humans were still the last pieces of the system, but everything else was automated. As soon as an account was past due, it got pushed to our giant queue and we could easily manage it in our workflow.
You have automated tools available at your disposal, so please use them. Bill.com is a platform you can use to invoice clients that has a built-in automatic reminder function. You can also use this platform to pay vendors. Another one is Invoice Sherpa; an integration you can use with your bookkeeping software to automatically send invoice reminders for past due payments.
I'm a big fan of protecting yourself from yourself. There are plenty of ways we get in our own way, like wasting psychic energy thinking about following up on invoices, but not actually doing any follow up because you've tired yourself out just dreading it.
Send Invoices From a Different Email
If you struggle with sending invoices and the automatic apps are currently a bit above your pay grade, consider setting up a separate email, like firstname.lastname@example.org or email@example.com or even just a name that isn't yours like firstname.lastname@example.org.
Use this email to send invoices and follow-up, collections emails. Yes, I'm suggesting you catfish your clients. I don't have any real data to back this up, but the anecdotal data I've collected from people who do this say it's helped them close the gap between receivables and cash.
I'm not entirely sure of why this helps. It might just give the person asking to get paid more confidence when they send an invoice. Others might feel like they can be more firm with clients who they have relationships with that feel more like friendships. Sadly, maybe clients' perception simply changes when it seems as though you have a staff or an admin person. Try it and let me know how it helps or if it doesn't.
Ask Early, Ask Often
Invoice right away. If you're a batching kind of person, invoice every Friday or every other Friday. If you can take time to invoice the same day you complete your services or deliver the product, invoice in the same day. Clients can't pay you until you tell them how much is owed and how to pay them. So the sooner you send the invoice, the sooner you can get paid.
Asking often means sending smaller, more frequent invoices. Even if you are expecting a large bill, once you get it, you still might get sticker shock. Or if you haven't properly managed for a big invoice, it may take you longer to pay it. For a multi-thousand-dollar invoice, sending smaller and more frequent invoices is not just good for your cash flow, but it could help your clients manage their cash flow too.
Make It Easy
Please make it easy to get paid. One way to make it easy to get paid is to deliver what you say you will deliver when you say you'll deliver it. If you did great work, your clients will be happy to pay you. The second way is literally making it easy by having very clear payment instructions. We are all lazy. We all make excuses to not do something or we put it off if a barrier pops up. So please make it easy, don't create unnecessary barriers like not having payment instructions.
If it's not too crazy for you to manage, give a few options. For example, when I invoice clients I provide a link where they can enter their debit or credit card data, I provide my mailing address and the issue to information if they want to keep it old school and write a check. I also give them my Chase Quickpay email, Venmo handle and Paypal email. I don't want anyone giving me some bullshit excuse about not being able to pay me. Fuck that. Let's all say it together now, class, "Fuck that."
Yes, it can be a lot to manage when payments are coming in from different places, but we should all be so lucky that we can't keep track of all the money people are just throwing at us.
Make sure you keep track of what invoices are outstanding. If you use bookkeeping applications like Xero and Quickbooks, it's ridiculously easy to see all of your outstanding invoices form one location. These programs will show you how many days past the due date each invoice is, how much is owed for each invoice and what the total amount due is.
That number is helpful. It's the gap between revenue and cash. If the majority of your invoices are less than 30 days past due, you're in pretty good shape. It means you're probably doing a good job collecting on what is owed to you. If most of your invoices are more than 30 days past due, you need to step up your collections game.
Relationships Are Everything
One of the best ways to make sure your invoices get paid on time is to manage your relationship with the person in charge of paying the invoices. Maybe it's an admin person or a bookkeeper. Be gracious and grateful. Take them out to lunch or send them a year-end gift. Or call them before you send your invoices and try to give a few fucks about how their kids are doing and what's new in their life. Be a nice person and really build a relationship. Don't be a dick.
For better or for worse, being a business owner means you'll probably spend a significant amount of time managing cash flow, collecting on money owed to you and managing your relationships with other people. The sooner you accept that reality, the sooner you can master it so that you can focus on the work that matters to you.