One of the challenges that most businesses face is not just how to manage invoices for customers but how to ensure that payment is made in a timely manner.
Cash flow depends on money regularly coming in and its health can often be the difference between success and failure for a business owner. Late payment can be particularly problematic for smaller businesses.
Especially in the UK, there is a tendency to delay payment when an invoice has been received. Estimates suggest that around 20% of small businesses encounter cash flow problems mainly because of these late payments.
There are several things you can do to improve this if you are a small business and ensure invoices are paid on time. That should include raising invoices yourself in a timely manner and making sure they are correct and comprehensive as possible.
If you agree on payment terms in advance it can help promote prompt payment but doesn’t always solve the issue, particularly with some customers. The other thing you can certainly do is have a strategy to chase up unpaid invoices once delays have been noticed.
Here we look at the correct way to bill your customers and get those invoices paid on time.
How do you raise an invoice?
If you want invoices paid on time, then you need to raise them correctly and get them out to the customer on time. Your invoice should be clear about what you are charging for and contain all relevant details.
If the invoice is too vague, it may give the customer a chance to delay or ask for clarification. In some circumstances, it can lead to disputes.
Each invoice should contain:
- The name and address of your business and contact details.
- The name and details of the person or organisation you are charging.
- Details of the item or items they are being charged for.
- Date of supply and date of invoice to be paid.
- Your bank details or options for paying the invoice.
- The amount you are charging – if there are multiple sections then you will need to include a total.
- If you are VAT registered and charging it to the customer, you must include your registration number.
- Details of how the customer can pay, including any terms agreed such as the time they have to issue payment.
Ideally, payment terms should be agreed upon when the customer buys your product or hires your service. This can include any additional charges for late payments.
When should invoices be raised?
In most cases, you will want to send invoices as soon as work has been completed or a delivery sent. The longer you leave sending an invoice, research shows us, the more likely you are to encounter late payments.
It’s common to send invoices electronically nowadays and this has several advantages. You can, for instance, attach links to direct payment options for your customer which can save time.
How long should you wait for an invoice to be paid?
If you’ve raised an invoice through something like an accountancy app, you can arrange for automated reminders to be sent to a customer for outstanding invoices at set times.
In any event, you should send a reminder if the payment has not been made within the payment terms.
A lot will depend on the type of business your run. In some circumstances, it’s appropriate to chase up after a couple of days, especially for smaller invoices.
Other businesses might have terms where there are, say, 30 days to get invoices paid.
Why do companies take so long to pay invoices?
Unfortunately, overdue invoices are not uncommon for businesses of all sizes. This is something that generally impacts small businesses more, however, because they have tighter overheads and can be subject to cash flow problems if money is not coming in regularly.
The company you have billed may have its own cash flow problems and might need a little extra time. Some large corporations such as supermarkets can have strict rules on payment terms which means businesses that supply them can end up waiting months for payment.
If there is an issue with the invoice this can also lead to the late payment, with the customer querying what they are being charged for.
This is why it’s very important to make sure that your invoicing is clear and transparent.
What can you do if someone refuses to pay an invoice?
If a customer is simply refusing to pay for no good reason, it can present several problems. Taking them to court can be costly and time consuming.
The first step is to send them a demand letter for the outstanding amount stating when the invoice needs to be paid by. This can often work but if payment is still not forthcoming you will need to balance up the cost of court action against writing off the invoice.
If you do have a dispute, and your business employs less than 50 people or you are a sole trader, you might consider contacting the Small Business Commissioner that can help resolve the issue.
Adding late payment fees to your invoice can be an option that discourages non-payment but not always. If you are going to add this, it needs to be proportionate and it’s a good idea to agree on the terms with the customer beforehand.
Can you raise an invoice before work is done?
In most cases, invoices are sent after the work is completed but this can vary depending on the type of service you provide. Early invoicing can only be done with the agreement of the client or customer, of course. You may also need to part invoice before the job is completed in full. Again, this needs to be with the agreement of the customer.
What makes an invoice legal?
An invoice is not a legal document in itself but should contain certain vital information such as the name and address of your company, what you are charging for and a unique invoice number.
An invoice is documentary evidence of the work you undertook and how much you charged and is essential for accounting purposes and how much tax you pay.
Do invoices need signatures?
Invoices do not need signatures generally in the UK as they are not legally binding documents (as opposed to a contract).
The top tips for getting paid on time are to make sure you issue invoices soon after work is completed and the document is clear and easy to understand. If you want to encourage invoices paid on time, agreeing terms in advance or adding late fees for delays can make a difference.
Staying on top of your invoicing can be challenging for small businesses. That’s why it makes sense to work with a professional accountancy team to make sure you tick all the right boxes.