In a perfect world, your clients would pay your bills straight away. But as any small business owner will tell you, the reality is often a waiting game. A study run by Xero among its small business users found that:*
On the positive side, technology is helping to speed things up. We bring you some other tips and tricks below for improving your changes of prompt payment.
At the start of every new customer relationship, clearly communicate your payment terms and conditions - and get them signed off. Then you can use the magic phrase: “as per our agreed terms, payment is due on XX date.”
At the very least, your terms should include:
- the credit period (see more on that below)
- a clause that outlines your right to charge interest on late payments
- a signature to show acceptance of the terms
This simple step could make a huge difference – do you need to shorten your credit period? Long payment terms (the likes of 30 days or 20th month following) are the old-school defaults from the days of snail mail and payment by cheque.
But due to online invoicing and payments, short payment terms are becoming the norm. In fact, Xero’s study found that:
Offering a prompt payment discount (say 3% if payment is received by a certain date) can be a very effective technique. The discount should be sizeable enough to be attractive, but without putting too much of a dent in your margins. For that reason, it’s only really viable for small businesses with a high net margin.
On the flip side, you can send a message to tardy payers by charging interest or ‘overdue fees’. You’ll need to clearly outline your rights with a late-payment clause in your terms, and on all your invoicing. Keep it polite, but firm…the idea is to change your client’s behavior, without damaging the relationship.
In the prompt payment race, technology is your friend.
Firstly, accounting software can ensure you get your invoices out the door promptly (some even let you invoice from your smartphone).
Secondly, the invoice templates also make it easier for clients to view and pay your bills.
And thirdly, technology also lets you send automated (yet friendly) reminder emails as the due date approaches; as well as alerting you to overdue payments.
Any burning questions?
Send us your burning question on Getting Invoices Paid on Time, and we’ll be happy to answer it.
Or if you want to know how KPMG Enterprise could help your business, give us a call on 0800 576 472.