Invoicing – the process whereby a seller demands payment for services or products rendered – is an essential function of every business, but especially small businesses as cash flow is critical. Invoices should be produced and delivered at the lowest possible cost and should stimulate the buyer to make total payment in the shortest possible time. Invoicing software for small business can help you reduce your invoicing costs, increase your collections, and improve cash flow.
1. Automate the Billing Process With Integrated Accounting Software
There are a variety of accounting software packages from major vendors designed to integrate order and billing process into your general ledger and management reporting systems, eliminating redundant staff work, improving management reporting, and reducing administrative expense. Your system should allow customers to manage their billing and payments online, thus transferring some of the tasks – and costs – to them. Popular software packages include Cashboard, Billbooks, InvoiceStudio, and Fresh Books. Cloud accounting software from Due, Quickbooks, Netsuite, and Sage provide robust accounting solutions including invoicing and billing, as well.
2. Use a Checklist For Initial Account Set-Up
Collecting as much information as possible when establishing an account saves time and expense later in the relationship. A physical checklist should be developed to ensure that critical information is not overlooked if account setup is manual. Online accounts should be programmed to solicit the same data, including the following information:
- Name of account
- Business address for invoices, receipts, and statements, as well as contact information for the representative who receives such information
- Telephone numbers
- Name and contact information for key customer representatives authorized to make purchases or resolve billing problems
- Tax identification numbers
Depending upon the product or service being provided, collecting additional information is also prudent. Such information might include copies of resale or tax-exempt certificates; names, addresses, and account number of customers’ main financial institutions; and confirmation that the client has received and accepted relevant policy and service agreements. Agreements might include disclosures of limits on warranty, returns, and your liability in the event of a product’s failure or misuse, as well as fees or interest to be imposed in the event of late payments.
The right information can help you meet your clients’ needs, so you can never have too much of it. Always keep it confidential and secure, and do not seek private financial information about your customers unless you are prepared to provide the appropriate security.
3. Use Electronic Invoicing Where Possible
Eliminating the printing, mailing, and storage of paper documents saves money, but it does increase security risks unless you take the necessary steps to safeguard the data. Offer electronic billing in lieu of paper, pre-design your invoices, and when you do print paper copies, do so automatically to reduce labor costs, and send them out the same day as your electronic bills. Whether paper or digital, all invoices and statements should include the following:
- Customer name, billing address, and telephone numbers
- Invoice number with product or service description and date of purchase
- Customer’s purchase order number and name of the person making the order
- Shipping information
- Payment terms, including any discounts for early payment or penalties for late payment
- Payment instructions including a physical address for receipt of paper checks, bank details for ACH payments, and instructions for credit card or PayPal payments
All documents must be easy to read and understand. There is usually a difference between the appearance of printed and on-screen documents, so be sure to take that into consideration. Use a sans serif font like Verdana or a serif font like Garamond, Century Schoolbook, Times, or Times New Roman with a minimum font size of 10 points. Limit any color to your logo or company name and use black print on white paper since many companies scan paper documents for digital storage.
4. Shrink Accounts Receivable Days Ratio
Whether you are a big business or an entrepreneur operating out of your garage, cash flow is critical. “Accounts receivable days” is a measure of how quickly you receive cash after you have made a sale. It is easily calculated by dividing your outstanding receivable balance by your annual sales, then multiplying the result by 365: (accounts receivable/total annual sales) x 365.
For example, if you have $100,000 in receivables at month-end and total revenues of $1.2 million, your accounts receivable days would be 30.42. In other words, it takes a full month from the time you invoice until you get the cash in the bank. If there is an additional week between when you complete the sale and send your invoice, cash flow is even more restricted. You can reduce the time between your sale and receipt of payment by doing the following:
- Offering Electronic Payments at Time of Sale. If you are selling a product, require payment by ACH transfer, credit card, or an intermediary like PayPal before manufacture or shipment. This practice eliminates any gap between sale and collection of funds, although it typically requires a fee be paid to the credit provider.
- Invoice the Day of the Sale. Some companies do their invoicing on a certain day of the week or month, effectively giving an interest-free loan to their customers. Instead, invoice your customers as soon after a sale as possible.
- Offer Incentives For Quick Payments. Many companies give customers a 1% or 2% discount if payment is made within 10 days of receiving the invoice. If you use this incentive, be sure to factor its costs into your pricing. You should also be aware that big companies often take advantage of any publicized discount even if they do not abide by its terms. If a large customer abuses a small business owner’s offer, that owner may have few options to discipline the customer.
- Institute Interest Penalties or Fees For Slow Pay. Instead of a carrot, such as incentives for early pay, some businesses use a stick by imposing interest expenses on late payments. However, collection of these fees can be difficult and may alienate a customer. Practically speaking, only companies offering a unique service or product essential to purchasers can effectively use this strategy. Be sure of your competitive position and importance to your customer before implementing a penalty system.
5. Make the Payment Process Easy For Customers
Make the process as easy as possible for your customers by offering several methods of payment, such as the following:
- Paper Checks. Consider having checks sent directly to a processing center in lieu of your location. You can also arrange for your bank to accept electronic images of checks for deposit. If you use point-of-sale (POS) equipment, investigate the benefits of online processing to secure immediate credit and avoid the risk of fraud and “bad” checks.
- Direct Deposit. Many banks offer an ACH service to small businesses which eliminates the need for paper checks completely, reducing costs and improving cash flow.
- Credit Card Merchant Account. A small business can accept credit cards for payment by establishing its own merchant account with a credit card issuer such as MasterCard, Visa, or Discover. Setup fees can be significant due to the security measures required, but individual transaction fees are low. While risk of non-payment is reduced, it is not eliminated since many credit card companies allow users to return merchandise or repudiate sales under certain conditions.
- Credit Card Third-Party Merchants. Also known as “payment gateways,” these companies are intermediaries between the credit card issuer and the business accepting credit card payments. One of the most popular is Paypal. Initial setup fees are generally low, while transaction fees are higher than a company with its own merchant account would pay. However, in transferring security to a third party, a company can expose itself to a public relations disaster if the payment gateway fails to implement necessary security protections.
In recent years, a new form of electronic currency has appeared. Bitcoins have received considerable publicity in recent months and some companies have begun accepting them for payment. Because bitcoins are unregulated and have a limited history of use, however, small businesses would be best advised to avoid this payment method for the time-being.
6. Constantly Monitor Your Invoicing Systems
There is no substitute for constant and thorough diligence, regardless of your process. All companies expend cash to manufacture products or deliver services, which means they depend on incoming cash to stay in business. However, small businesses rarely have large financial reserves, making cash management critical to their survival. As an owner, stay on top of your accounts receivable and your collections through daily, weekly, and monthly reports so you can intervene with customers at the first sign of difficulty.
There is no perfect solution to cash management or plug-in substitute for invoicing that can meet every contingency. Implementing the above tips and keeping abreast of your progress on a regular basis can mean avoiding many of the common problems that arise from invoicing, billing, and collections. Being a small business owner is risky under the best circumstances – do not make it harder by overlooking obvious steps that can improve your results.
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