Submitting Invoices and Collecting Receivables
Whenever you provide a service for a customer, or sell something at a price, you need to record these transactions formally with an invoice. Invoicing becomes particularly important when you let customers defer payment for the transaction by providing them credit. From the date that the invoice is issued until it is paid, the value of the invoice is regarded as a receivable to your business. How do you submit an invoice professionally—and make sure it is paid in a timely manner? Every business considers that a fundamental to being in business.
In business, there are a few essentials that you must master. Using an invoice process is as much for you as it is for your customers. In the simplest sense, an invoice is a historical record of a business transaction. Yet, as your business grows, invoices can be used to track many aspects of the business. If done correctly, each invoice confirms details of the goods or services supplied and the prices charged, can be used as the basis for all your financial management and accounting processes, and is a key document in tax records. For a customer, of course, an invoice acts as proof of purchase.
No. There are three basic types of invoices:
- Pro-forma—Often used with a new customer, this type of invoice requests payment in advance of the provision of goods or services.
- Standard—The regular form of an invoice, it is normally classed as a sales invoice by the business that has sold the goods and as a purchase invoice by the buyer.
- Credit note—This is provided when a customer deserves a credit after the issuance of an invoice. For example, this invoice is used when goods are returned for credit or a pricing error has been made. The credit can either be refunded to the customer or used for a future transaction.
A good invoice has a number of elements that are helpful to both buyer and seller in understanding the basics of a transaction:
- a unique tracking number
- your business name, address, and contact information
- a posting date
- your customer's name (or business name) and address
- a description of the quantity and type of goods or services supplied
- freight or shipping costs billed to the customer, if any
- the payment terms
Once an invoice is issued, it becomes part of your Accounts Receivable.
If the transaction is small and if payment is made immediately, most businesses just issue a receipt that will not have all the usual information provided on an invoice. Such practice is fine for small one-time transactions that are paid for at the time of purchase, but most business-to-business transactions require an invoice.
There are deadbeat customers. Before you arrive at that conclusion, you should first find out why your customer hasn't paid the invoice. If it is a simple issue, such as a genuine pricing or quantity error, then it should be simple to resolve. However, if the reason given is not acceptable to you and a negotiated agreement cannot be reached, you will need to take action to recover the money due. This can be done in several ways:
- Go to the small claims court. The amount you can recover is limited; in the United States, most courts of this nature restrict settlements to under $5,000.
- Employ a lawyer to pursue the debt. This may only involve sending a letter on your behalf but may mean managing the whole process of pursuing your claim through the court system.
- Engage a collection agency. Such firms will either manage the process for a fixed fee or work for a commission of the debt that is collected.
You need to balance the time that it will take to pursue your customer for payment against the costs involved with using the services of a lawyer or collection agency. In some cases, hopefully rare, you might consider writing off the debt either to maintain goodwill with the customer or as an expensive "lesson learned" about the unreliability of some customers.
Any time you issue an invoice, you will need to produce two copies: one for the customer and one for your own records. Invoices are sometimes done by hand, but normally a computer program is used. Invoicing does not have to be complicated. An invoice can be issued by using a simple word processor. This simple approach can work well, but once you start to offer credit it makes more sense to use an integrated accounts system that manages both invoicing and credit control. This means that you will want to consider specialized software tied to invoicing. There are many products available, and some of them simultaneously tie to inventory control, tax considerations, and cash flow monitoring.
If you offer credit to your customers, then issuing a sales invoice is just part of the sales process—the transaction is not completed until the invoice has been fully settled. Many businesses are very successful at selling their goods or services yet still fail because they are unable to collect the money owed to them (often because of the fault of the seller!). So it's vital to set up processes that minimize the risk of losing track of what's owed you.
What to think most about if you offer credit? Make sure that credit is only offered to credit-worthy customers and that you agree payment terms with them in advance. Check the accuracy of invoices before you send them out and provide customers with monthly statements showing their account balance. When credit terms are exceeded, send reminder letters. Be prepared to put a customer's account on hold if payment-per-the-terms is not made.
Inevitably, there are going to be situations that lead to an invoice not being paid on time. You will then have to decide on the best approach to recover your debt. How do you decide this? Much will depend on the behavior of your customer, their size and importance to your business, and the size of the debt. The more you learn about your customer, the better you will be able to handle future transactions. For example, consider whether non-payment is tied to one of the following situations:
- A habitual slow payer—It's possible that you are not the first person who has had problems with this customer; their previous supplier(s) may have closed their account because of continuing problems with late payment. These types of customers will go through long delaying tactics as a matter of course and can waste a huge amount of your (or your finance department's) time in chasing them. Undertaking credit checks can help to minimize this risk, but often it is only by adopting very tight credit controls and setting low credit limits that you can address the problem. Such customers can possibly warrant the extra attention you need to give if you can impose higher prices or added fees that reflect the higher cost of doing business with them. Be careful, though; you should not be spending more time on your bad customers than you are serving your good ones.
- A dispute—Misunderstandings about the terms of a transaction are quite common, and the easiest way to avoid them is to make sure that each stage of the sales process has been fully documented. Keep in mind, always, that the burden of proof for what a customer owes you is your responsibility. You must have complete, thorough, accurate records of each transaction. You must also be reasonable in dealing with all customers. If the dispute does end up in court, you will need to be able to demonstrate that you have explored all avenues to resolve it, so you should document the process carefully.
- Financial difficulties—This is probably the most common reason for non-payment of an invoice and is often not revealed by your probably embarrassed customer—the customer may simply be short of cash. On the other hand, there may be major financial problems looming behind your customer's assurances that payment will be coming soon. You can always consider allowing a customer to pay you in installments. If you do that, consider whether you can impose a "carrying charge" for your willingness to extend him special credit terms not laid out in the initial transaction.
If a customer's business faces long-term or extreme cash flow problems, it is unlikely that you will ever be paid the full amount you are due. Knowing the legal status of your customer's business is important under these circumstances, because this will determine how you can pursue the recovery of your debt. For example, what if your customer ends up in bankruptcy court? Often, the best that you can hope for is that you can claim title to the goods that you have supplied, which may still have some value to you. Again, you should insure that a retention-of-title clause is used in all of your terms of sale and all invoices which involve the sale of goods.
Issuing invoices promptly helps you track sales and manage cash flow. It also helps a customer keep track of his expenses. Taking too much time to invoice will lead to delays in your getting paid, because payment terms will be based on the invoice date—not the date that you supplied the goods or services.
If there's no valid reason for non-payment, don't delay the process of debt collection because you're worried about upsetting your customer. You are a business, not a charity. It's important to keep the goodwill of a customer, unless you are suffering greatly because of his or her unreasonableness or lack of follow-through.
Cloud, Jeanette.