Invoicing can be one of the most stressful parts of running a small business. On one hand, effective small business invoicing requires certain processes and policies (more on that later). On the other hand, one of the most challenging things about invoicing for small businesses is asking customers politely but firmly to pay on time or to make good on late payments. No one wants to play the role of debt collector or risk irritating customers.
Despite some small business owners’ discomfort with invoicing and collections, these activities are essential to running a business. It is how you get paid and consequently, greatly impacts operating cash flow. If you want to avoid uncomfortable interactions with customers and reduce your uncertainty about collecting payments, it’s helpful to understand what you can do to achieve this.
With this comprehensive guide to small business invoicing, we’ll give you some ideas and suggest tools for making invoicing easier, improving payment collection, and boosting cash flow. The guide covers:
Table of Contents:
- Invoicing and Collections: Why are they so important?
- How to Create Invoices for a Small Business
- Invoice Templates
- Invoice Payment Terms
- Invoice Collections: Create a strategy
- How to Collect Unpaid Invoices
- Can you Write Off Unpaid Invoices?
- Invoice and Collections Technology
Invoicing and Collections: Why are they so important?
Of course, the most important (and obvious) reason to optimize your invoicing and collections is to get paid on time. The better you are atincome management, the healthier your cash flow, and the more flexibility you’ll have for business opportunities. But there are other reasons your small business should be efficient with invoices.
An invoice signed by your customer or attached to a signed purchase order is a binding contract. In the event of missed payments or nonpayments, it provide the documentation you need to prove what you’re owed. Of course, you have to provide the products and services agreed upon before the invoice is due.
If you’re a small business selling to other businesses, you have to issue an invoice for tax purposes. Your paid invoices are proof of your income. Keeping accurate records of your income and sales using invoices is a good idea even if you sell directly to consumers. In the unfortunate event that you can’t collect, unpaid invoices can be tax deductible.
Invoice factoringandinvoice financingare two ways to reduce your accounts receivables balance if necessary. If you need a cash flow boost, you can consider an advance on invoices. The basic idea behind invoice factoring and financing is that you sell the invoices to a third party, or a third party collects on your behalf. They charge a fee for this service.
Maintaining records, tracking, and analyzing payments are crucial to small business success. Invoices make it easy to access key business information.Tracking invoicescan help you spot customer buying patterns, and risks, identify product seasonality and other trends and inform budgeting and forecasting.
It’s important to be professional in every communication with customers, even billing. Invoicing shows your customers that you’re serious about your business.
How to Create Invoices for a Small Business
Sending an invoice is the first step in getting paid, and it’s important to get the process started correctly. Additionally, invoices represent your business and brand to your customers. That said, it’s more important what’s on an invoice than how it looks. The information on an invoice must be clear, easy to understand, accurate, and comprehensive.
Always include the purchase order number (if applicable) and a sequential invoice number (for both parties’ record-keeping). Follow the checklist below to cover all of the other required details. Remember, the goal is to be extremely clear, and make it easy for the customer to pay.
- The word “invoice” at the top
- Company logo
- Your company’s address
- Your business tax ID
- Contact person for billing
- Address and contact info for the customer
- The customer’s account number
- The date the invoice was sent
- An itemized list of the products or services provided, including date, quantity,and price.
- Taxes
- Fees and charges
- The total amount owed
- Payment due date
- Any special terms
- Payment methods (check, Paypal, credit card, etc.) with links to payment services (e.g. PayPal)
- A brief explanation about how late payments and non-payments will be handled
Okay, that’s a lot! But it doesn’t look so cluttered on paper (see the invoice templates below). Luckily, invoices can be created with a variety of tools. Businesses often use Word or Google Docs, Excel or Google Sheets, or accounting software (more on that later). Some merchants—like PayPal and Square—provide invoice templates.
Invoice Templates
If you’re sending invoices from scratch, check out the Word and Excel invoice templates below. They include all of the information above. You can download and customize them to fit your specific business needs
Invoice Payment Terms
Payment terms have a lot to do with how you invoice and collect. Payment terms should be very clear both at the time of sale and on your invoices. These are the most common terms on invoices:
| Payment Upfront | Payment is required before goods or services are provided. Also known as advance payment. |
| Net 15 | Payment is due 15 days from the invoice date. |
| Net 30 | Payment is due 30 days from the invoice date. |
| Net 60 | Payment is due 60 days from the invoice date. |
| Upon Receipt | Payment is due as soon as the invoice is received. |
| 2/10 Net 30 | Payment is due 30 days from the invoice date, but a 2% discount is applied in the first 10 calendar days. |
Which invoice payment terms should you use?
Payment terms depend on factors such as your industry, your business needs, your relationship with the customer, and theircredit record. Ultimately, your payment terms may vary based on your customer, product, or service. Many small businesses request immediate payment when selling consumer goods. If you own a service business or sell to other businesses, your terms may depend on the credit worthiness of the customer and industry norms.
Payment terms can also be used as a competitive advantage if your cash flow can support it. Offering Net 60 or Net 90 terms when competitors offer Net 15 may be appealing to customers. Early payment discounts can be appealing as well.
It’s important to note that payment terms should be monitored and reviewed to ensure they align with the customer’s payment behavior and business or credit needs. Let’s look at some examples of when to use different payment terms.
Net 30
Net 30 is the most common payment term used by businesses. It means that the customer has 30 days to pay the invoice in full. In business-to-business invoices, it gives the customer some flexibility to protect their cash flow, and also helps you get paid on time. It does require some trust that the customer will pay, especially early in the relationship.
If you’re just starting out with a new customer, you may want to use a shorter payment term like Net 15. This will help you get paid faster and build trust in your new customer.
Upon Receipt
This payment term means that the customer must pay the invoice as soon as they receive it. This is a good option if you’re providing a service that doesn’t require a lot of work upfront or if you need to get paid quickly. “Upon Receipt” payment terms should be communicated clearly in advance because not all customers will be able to meet the terms—especially if it’s a surprise.
EOM
EOM stands for end of month. This means that the customer has until the end of the month to pay the invoice. This term is often used when businesses have a lot of invoices to process and want to simplify their accounting. If you’re planning to bill with EOM payment terms, be sure to send invoices promptly so customers feel they have enough time to pay.
Early Payment Discounts
If you want to encourage your customers to pay their invoices early, you can offer an early payment discount. For example, you could offer a two percent discount if the invoice is paid within seven days.
This payment term can help you get paid faster and improve yourcash flow.
Payment terms are a balance between flexibility for your customers and protecting your cash and operations as a business. Be sure to understand competitive standards and what your customers expect. This will provide a good starting point for negotiating payment terms.
Invoice Collections: Create a strategy
A lot of the stress associated with small business invoicing is related to collecting payment for invoices. In a perfect world with perfect customers you would send an invoice and everyone would pay on time. That’s not reality, of course!
The good news is, most customers will pay on time and in full. Therefore, if you have a robust strategy in place for invoicing and collecting, your chances of receiving regular payments will be higher. This will lead to more predictable and manageable cash flows. Also, you won’t need to chase down payments regularly, which can lead to unpleasant interactions with customers. It also consumes your time that could be better spent growing your business.
With that in mind, let’s look at some measures you can take BEFORE a customer receives and invoice, and some steps you can take to streamline collections AFTER you send an invoice.
Review Your Invoicing Process
The invoice collection process actually begins before you get to the point of collecting payment. The easier it is for customers to pay, the more likely they’ll do it on time. There are countless ways to improve your invoicing, including:
- Make it EASY to pay (Check, Credit, Debit, Venmo, Paypal, payment plans, etc.).
- Use technology to track invoices.
- Let customers know what the invoice terms are by having them sign a credit policy.
- Incorporate a late payment fee/penalty process.
- Let customers know you’re reporting to credit agencies.
- Make sure the right person gets the invoice.
- Ask how the customer prefers to receive an invoice.
- Create a repeatable invoice format that’s clear, concise, and easy to read.
- Send out invoices on a certain day/time.
- Proactively confirm receipt of invoices.
- Schedule follow-up reminders before and after the due date.
- Use collections letter templates.
- Review your portfolio of clients for late-payments and creditworthiness regularly.
- Make changes to payment terms as needed.
One of the biggest mistakes you can make as a small business owner is trying to do everything manually. Invoicing and collections are the lifeblood of your company and its cash flow.
It often makes sense tooutsource it or hire a bookkeeper, accountant, or administrative professional. If that doesn’t make sense for your business, use every technology resource at your disposal the clean up your process.
How to Collect Unpaid Invoices
There’s always a chance that customers won’t pay their bills on time. Regardless of the reason, unpaid invoices create gaps in your cash flow, and multiple unpaid invoices can cause serious problems for your small business.
As a small business owner, you ARE in control of a number of elements in your payment collections process.
As we mentioned before, most late-paying customers mean well. Missed payments should be handled proactively, but not in an aggressive or irritating way until the problem escalates. Here are some steps you can take to get unpaid invoices paid:
After an initial invoice is overdue a certain number of days, send a reminder with a clear due date. Your invoice policy should explain a late fee or penalty if this due date isn’t met.
If your phone call is unsuccessful, for documentation purposes you can send an initial formal collection letter simply informing the customer that they owe you money and reminding them of the amount due including any late fees and the original payment due date.
You might also offer solutions such as a payment plan or remind them that you report to credit agencies.
When you haven’t heard back yet, you’re within your rights to send a final warning debt collection letter outlining the legal and credit reporting actions you’ll take if payment isn’t made right away. If necessary, tell the customer when services or shipments will stop.
Sometimes cessation of services or products is all it takes to get a customer’s attention.
You may need to turn collection over to professionals if the debt is over 90 days old and the customer is unresponsive.
Engaging a debt collection agency should be a last resort for a few reasons. It’s almost certainly the end of your relationship with the customer. Also, it’s expensive, with most agencies taking 25%-50% of the amount collected. Weigh the cost of collection against the potential write-off or negative impact on your relationship with the customer.
If the customer doesn’t respond to the debt collection agency’s efforts, you could talk to an attorney about filing a lawsuit. You could also take the customer to small claims court.
A lawsuit takes a lot of time and effort, so you have to weigh the potential outcome with the distraction it might cause for your business. You also have the option of taking a tax write off, which we’ll cover below.
Can you write off unpaid invoices?
Hopefully it rarely happens to your business, but there may be times where you cannot collect. In this event, your accounting method determines how it applies to your taxes.
If you use cash accounting, you can’t write off an unpaid invoice since you only record revenue when you get paid. By contrast, if you use accrual accounting, you’ll have accounted for the revenue when you delivered the product. In this case, you classify the unpaid invoice as a bad debt expense.
Unpaid invoices can be written off on your tax return if you can prove to the IRS that they’re bad debts. Three conditions must be met:
1. The unpaid invoice has no value
All your efforts and systems to document and track your invoicing and collections process will help to prove the invoice is worthless. Unless the customer went bankrupt or passed away you need to be able to show that they simply won’t pay you.
2. It is connected to your small business
Again, invoices can prove that your non-paying customer was obligated to pay your business.
3. It has created an economic loss for your business
You simply have to show that you accrued the income related to the invoice for products delivered and services rendered and now have to record it as a bad debt expense (loss).
Once these conditions are met, you can most likely write off the debt. However, we strongly advise you to consult with an account or your tax advisor regarding writing off unpaid invoices.
Invoice and Collections Technology
While it’s fine to use an invoice template to generate invoices, it takes time and puts you at risk for human errors. You might forget to send the invoice, omit calculations, or struggle to track payments. In today’s digitized world, more and more small businesses are turning to invoice and collection software to streamline their workflows. It removes the stress from invoice and collections process.
Using an accounting software, you can automate the workflows associated with sending invoices, tracking payments, communicating with customers, and more. These are some of the common features of invoicing software:
- Create custom invoices
- Auto-populating invoice templates
- Record keeping
- Invoice number issuing
- Invoice creation and sending
- Balance and payment tracking
- Automated reminders
- Tax filing
- Business analytics
- Integration with other financial and business management software
There’s a lot of benefits to using invoicing software, like quicker payments, a wider choice of payment options for customers, proactive and consistent communication about payments, a digital trail of the process, and better cash flow forecasting.
As far as collections go, use a tool that tracks and predicts customer behavior so you can stay ahead.One-touch collection follow-ups available for free. Most importantly, collections provide the money you use to grow and operate, so use a collections tool that helps forecast cash flow.
The Bottom Line: Invoicing and Collections
Depending on your business model, preparing invoices and collecting payments could be the most important task you perform. Your small business invoicing and collection process is the engine for generating the cash flow your business needs to operate and grow. Inefficient invoicing and collections can hurt your business, and the minor details matter.
A well-planned invoicing and collections strategy supplemented by technology will provide major benefits. Small businesses that master the art will see improved cash flow, predictable income, improved customer satisfaction, and ultimately, reduced stress levels.
