Invoicing practices can significantly impact your bottom line. It’s essential that you have the best invoicing processes in place.
According to a survey done by QuickBooks that involved 400 small business owners and 500 self-employed individuals, state that half or more than half of their invoices are paid late, resulting in numerous cash flow problems. It has also been discovered that small businesses were owned nearly $825 billion in unpaid invoices over 12 months according to research that was published in 2016. To put that into perspective, that figure is the equivalent to 5% of our country’s Gross Domestic Product (GDP).
For many business owners and self-employed individuals, invoicing may seem like a no-brainer. You send out the invoice with the amount owed, and your customer pays you, right? In reality, there is a lot more to invoicing than just letting your customers know what they owe so they can pay you. Here are some common mistakes business owners make when invoicing and how you can avoid them.
Common Invoicing Mistakes
Invoice mistakes are an inevitable part of business, but most can be avoided by implementing a few crucial steps.
Invoicing the Wrong Person
Sending an invoice to the wrong person is more commonplace than you might think. Most businesses have multiple people working in an accounting department handling different financial aspects, and typically a specific individual is in charge of processing invoices.
When you’re about to finalize a project or job for your client, you should find out who you need to get in touch with to get paid. Set aside a few minutes to email that individual to introduce yourself, your business, and let that person know to expect your invoice when the time comes.
By taking the time to determine who is in charge of processing invoices, you can save yourself and your client a lot of unnecessary delay and confusion
Invoicing Without Expectations
Just like any business relationship, there are expectations on both sides. Your clients expect you to deliver quality service or products by a specified time and you expect to be paid for your service or work once complete. An invoice shouldn’t just tell a client what you’re owed and their payment options, but it should also include other relevant information. Here’s some additional information you may want to include:
- Penalties for late payments: In the United States, the laws for late fees vary from state to state. Check with your legal counsel before implementing a late-payment policy.
- Incentives for on-time/early payment: You may want to consider offering a discount to a client who pays on-time or early. To help with retention, you may even want to consider offering a discount for upcoming or future work.
By including other relevant information on your invoice, beyond what is owed, you can make the payment process much easier for both you and your client.
Although every client you encounter will be different and have a customized invoice, how soon after work is completed that you send an invoice should be consistent. It most cases it is advised to invoice immediately for two reasons: One so that you don’t forget and two so you can take advantage of a customer’s satisfaction on what you’ve delivered.
Time, date, and day of the month also play a role in ensuring that you get paid. For example, if you invoice a client on the 10th of the month, but they only pay on the first, you’ll be waiting nearly 20 days for payment.
You should work with your client to determine the best time to invoice and continue the same invoicing process moving forward. The client will be able to plan accordingly to ensure they can pay the invoice and you will be able to better budget knowing when you’ll be paid.
Invoices Lack Personalization
You may be asking yourself, why does my invoice need personalization? Well, it has been found that businesses that add their company logo to an invoice are three times more likely to be paid. If a client is receiving a handwritten invoice on a post-it note, they’re going to think you’re unprofessional and treat you as such.
Remember that your invoice is an extension of your business, and your logo serves as an identifier, marketing tool, and brand ambassador.
Using Manual Invoices
Humans make mistakes – there’s no way around it. There are many errors that can occur when using a manual invoicing process. This includes missed discounts, forgotten credits, duplicate invoices, and inaccurate payments.
Even if your invoice is perfect, if your client is processing invoices manually, this can lead to delayed and incorrect payments. Manually processing invoices is wasted time and resources, so invest in software that is able to help you accurately process invoices.
Big Picture Factors To Consider
Not only do you need to be aware of potential invoice mistakes, but you also need to take into consideration your business financial processes.
Using The Correct Accounting Method
Ensuring that you’re using the correct accounting method, whether cash or accrual, is extremely important. The accounting method you use impacts your ability to make informed business decisions, such as when or how to invoice a client.
Each accounting method has its own features and limitations, so you must choose the best that fits your needs. As an example, accrual accounting will provide invaluable insight into your accounts receivable and payable that aren’t offered through cash accounting.
The accounting method you chose will depend on several factors, such as the product or service you offer, the size of your business, and your revenue. Your accounting method also impacts your taxes. For example, when using the cash accounting method, your taxes have to be reported on a cash basis.
Managing Cash Flow
Many businesses have met an early demise because of mismanaging their cash flow. Knowing the cash flow of your business is vital to keep everything up and running. By accurately monitoring your cash flow, you can make smarter business decisions when it comes to paying bills. For example, you can plan to pay a bill when more substantial receivables come in, rather than paying when you’re low on cash.
If you know your company is tight on cash, you can make informed operational decisions and limit spending. The best advice is to stay on top of your financial reporting, be diligent when collecting your receivables, and have a firm understanding of your business cash flow status at any given time.
Integrations for Efficiency
Organization is a crucial aspect of ensuring successful accounting. Without organization, you’re just creating stress for yourself and your employees. Thankfully, accounting software can do all the organizing for you.
With accounting software, you can automate tedious tasks such as paying bills and payroll. By automating these tasks, you can increase business efficiency and save yourself time and stress. You can use the extra time to focus on more critical parts of your business.
By taking advantage of accounting software, you can make your job easier and ensure your organization’s operational efficiency. Most solutions offer monthly payment options, so you only have to pay for what you need.
Understanding Key Accounting Metrics
Are you managing your resources properly? Do you have any outstanding debts? Is your business successful? To answer these essential questions, you have to understand your key accounting metrics. These include parameters such as monthly revenue, average cash burn, net margin, gross margin percentage, and year to date revenue. You need to understand these metrics so you can maintain the financial health of your business.
You don’t want to make any bookkeeping mistakes that could hurt your business in the long run. Automate any tedious accounting tasks, so that you know they are correctly done, on time and are accurately organized. If necessary, reach out to a CPA to ensure your accounting file is accurate and up to date.
The Bottom Line
By implementing invoice procedures and ensuring the financial stability of your business, you can meet your bottom line with ease.
A recent study done by QuickBooks shows that 59% of those surveyed waited from one month to two years to get paid. For individuals who are self-employed, such delayed payments can drastically affect not only their professional lives but also their personal lives.
Late payments are often out of your control, but by having an excellent invoicing process in place, you can significantly improve your chances of being paid on time.
Not only is an invoice used as a way to help you get paid, but it is also a legal document that can be used as evidence in the event you need to settle a dispute or audit. The benefits that come from a robust invoicing process don’t just impact your business, but also your clients. They will appreciate your timely, accurate and easy-to-understand invoices.