How to Collect Invoices and Avoid Overdue Accounts

The invoicing and collections process is one of the most important jobs at any company. Growing companies have to be good at getting paid for their products/services. Timely payments provide you with the cash flow to pay wages, suppliers and other important expenses.

Collecting unpaid invoices doesn’t have to take a long time or be tedious. With the right system in place, the process can be done quickly and effectively. From this article, you will learn:

  • How to minimise unpaid debt
  • How to determine if a client is creditworthy
  • The best way to raise and submit invoices
  • A simple trick to avoid disputes
  • How to improve cash flow if clients pay slowly

How to manage invoicing and collections

The best way to avoid collections problems is to prevent them from occurring in the first place. This system combines a method of identifying potential clients early on with a good invoice submission and follow-up system. The result should be improved cash flow and fewer collections hassles.

Step #1: Provide net-30 terms only to clients who deserve it

The most important rule of good cash flow is to offer net-30 payment terms only to clients who have a good track record of paying their vendors on time. Following this simple rule eliminates most overdue account issues. Clients who don’t have a good track record should pay in advance or at delivery. It’s that simple.

Reviewing the payment record of a prospective client is relatively easy. You can do so by purchasing a report from a commercial credit bureau. Reports are easy to read and understand, and they provide valuable information. Two well-known credit report providers in Australia are VEDa and Dun and Bradstreet.

Step #2: Have a contract in place

Every sale that you make should be governed by a contract. The contract must outline the scope of the service/product, delivery time frames, how to submit invoices, and how to handle disputes. Without a contract and a well-defined payment clause, it is difficult to collect unpaid invoices.

Larger clients may insist on using their standard purchasing contracts instead of using yours. If that is the case, familiarise yourself with their payment and dispute resolution process.

Step #3: Use an acceptance letter

One simple trick to improve your collections and minimise disputes is to use a delivery acceptance letter. It’s an informal letter that states that the client has received your product/service and finds it acceptable.

Once you deliver your product/service, ask a client representative to sign the letter. Obviously, if they are unhappy with your service, they will not sign the letter. This scenario gives you an opportunity to fix the problem quickly and avoid a complicated dispute later on.

If you want a more formal letter that could be used in case of legal action, ask a lawyer to help you. However, the main purpose of this letter is to help you avoid disputes and problems in the first place.

Step #4: Raise and submit invoices the right way

Most contracts have a provision regarding how to raise and submit invoices. It’s important to follow these provisions, or your payment could be delayed. If the contract stipulates that the invoice should be sent to the payables department, with a copy to a project supervisor, do so. Otherwise, you could face payment delays.

Be sure to include all the required paperwork with the invoice. Also, send a copy of the signed acceptance letter from Step #3 along with the invoice. This extra step can help speed up your payment.

Lastly, contact your client a day after submitting the invoices to confirm that they got everything and that nothing is missing.

Step #5: Follow up with clients to avoid overdue accounts

If you have followed all of the previous steps, most of your clients should pay their invoices on time. However, it’s a good idea to have a follow-up system in place, just in case some clients don’t pay on time.

Contact clients five days after the invoice is due to politely ask them about the overdue payment. Ask them if everything is fine, or if they need any additional information from you. If possible, negotiate a new payment date for the overdue invoice.

If the client does not pay on the new, agreed-upon date, repeat the process and try to get a new payment date. If they fail to pay the invoice one more time, you can assume the invoice is a collections problem.

Step #6: Manage disputes

The acceptance letter from Step #3 should have caught most potential problems before they become full-blown disputes. However, every so often you will encounter a disputed payment. If there is a problem with the quality or your product/service, do your best to fix it immediately – even if it is not entirely your fault. Keeping clients happy is important.

However, if the reason for the dispute is not your fault and if the client is unreasonable, consider referencing the signed acceptance letter. This step usually resolves the problem.

It’s important to keep all communications with the client polite and professional – even if they are being unreasonable. Remaining calm is one of the most important collection tools you can use.

Step #7: Manage collections problems

This system should minimise how many unpaid and un-collectable invoices you get. However, you may still get a client who is unable – or unwilling – to pay. Unfortunately, this problem happens, regardless of how good a collections system you have.

In this case, consider working with a specialised collections agency. Managing bad debt collection internally takes away morale and resources that could be used to grow the business.

We also suggest that you read “Debt Collection Guidelines for Collectors and Creditors.” While this guide has an emphasis on individual debtors, many of the principles also apply to corporate debts.

Cash flow problems due to slow payments

One of the problems of providing 30-day net payment terms to clients is that it can create cash flow problems for you, even if your collections are good. Many small and growing companies can’t afford to wait 30 to 60 days for a payment. They need the money to pay wages, suppliers and other expenses. In this section, we discuss how to solve this problem.

A simple trick to improve cash flow is to offer your clients a discount for early payments. If you can afford it, offer clients a 2% discount if they pay in ten days or less. Many larger (well-capitalised) clients take this offer because it benefits them.

However, early payment discounts are not perfect. They are voluntary and your clients may choose to take the discount or not. They still have the option to pay on their regular terms. You never know for sure until you get the cheque or bank deposit.

A better alternative to improve cash flow is to use debtor finance. This option allows you to finance invoices and provides your company with predictable cash flow. Qualifying for debtor finance is easier than getting an overdraft or similar bank facility.

There are three forms of debtor financing: invoice factoring, invoice discounting and progress claim financing.

Option #1: Invoice factoring

Invoice factoring allows you to finance slow-paying invoices from creditworthy clients. Basically, instead of waiting for payment, you get funds from the debtor finance company. Invoices are funded and tracked individually.

Most invoices are financed in two transactions. The first transaction covers up to 80% of the invoice. The remaining 20%, less fees, is funded as a second transaction when your client pays in full.

Most invoice factoring programs also include credit management and collections services, which makes them ideal for small and growing businesses. Learn more about invoice factoring.

Option #2: Invoice discounting

Invoice discounting is similar to invoice factoring, except that it’s a funding-only facility. Invoices are financed in bulk and not tracked individually. The client retains the responsibility for collections. This solution is offered to larger companies that have a well-defined credit and collections departments. Learn more about invoice discounting.

Option #3: Progress claim financing

Progress claim financing is a special type of invoice factoring that is offered to companies in the construction trade. The solution allows construction subcontractors working under the Security of Payments Act to finance their progress claims. Learn more about financing progress claims.

Do you need debtor financing?

We are a leading provider of debtor financing and can provide invoice factoring, discounting and progress claim finance at competitive rates. For a quote, fill out this enquiry form.