Cash Flow Solutions

Do Your Invoicing Methods Affect Your Cash Flow?

Woman business owner reviewing a paid invoice on her laptop

In many industries, small business owners and freelancers rely on invoicing to get paid. If your invoicing process has holes, that can negatively affect your cash flow, and you should learn effective invoice strategies to improve your cash flow. Businesses live and die by cash flow— if you don’t have enough cash on hand, you can’t pay for inventory, loans, vendors or employees. Ultimately, a poor cash flow can shatter your operation. Here’s what you need to know.

3 ways ineffective invoicing affects cash flow

Ineffective invoicing techniques can hinder your cash flow. Instead of receiving checks from clients, you’ll be trying to figure out which bill can be ignored or spending time making follow up calls to get customers to pay. Here are three major invoicing errors and how they affect cash flow.

  1. Invoicing mistakes

If you send out invoices with the wrong information, clients may refuse to pay them. In these cases, the client is likely to call and request a new invoice – that takes time and delays your payment. To avoid mistakes, keep detailed records. For example, consider using an invoicing program that allows you to track hours and expenses related to each client and project so that you can easily generate invoices based on that information. Also, consider proofreading every invoice before you send it to ensure there are no mistakes.

  1. Delayed invoicing

Ideally, you should always send invoices as soon as possible after the service is rendered, and if appropriate for your industry, you may want to invoice before the products or services are dispatched. If you wait too long to send the invoice, your clients may have already forgotten about the services. It’s not fresh on their minds, and as a result, they may just ignore the bill. That disrupts your cash flow, and it makes it harder to predict who’s going to pay and when.

  1. Allowing late payments

If clients know that they can pay late, they will. Whether you’re dealing with other small businesses or individuals, most people have other obligations. If one bill has a hefty late fee and another has no consequences for late payments, clients will almost certainly ignore the one the latter.

If you’re the latter, you won’t get the funds you need in time. To deter this from happening, you may need to implement some late penalties. This could be a nominal fee or a percentage of the balance owed, but it could also mean refusing to provide service to that client again until they pay. The fees should act as a deterrent, but they should also cover the cost of any collection activities you need to get the bill paid.

3 ways effective invoicing affects cash flow

The right invoicing strategy for you depends on your clients, your industry and your personal preferences, but employing the following techniques can all help to improve your cash flow.

  1. Timely invoicing and early payment incentives

Just as delayed invoicing can set off a chain reaction of late payments or ignored bills, timely invoicing can have the opposite effect. Send invoices to your clients as soon as possible. If the service is fresh in their mind, they are more likely to respond to the bill.

On top of that, you may want to offer incentives for paying early. For instance, if clients pay at the time of service, offer them a small discount. Potentially, this can be more effective than punitive measures. Many people are reward motivated.

When managing your small business, it’s important to ensure you don’t inadvertently lose money you need by offering an early payment discount. For example, if you offer a 10 percent discount for early payment, the discounted price should be the amount you want to make for the service, and the full price should be slightly more than the amount you need to make.

  1. Invoice reminders

Occasionally, someone forgets to pay a bill. Jog your client’s memory with a reminder. Ideally, you should have an automated invoicing process that sends reminders anytime a bill is unpaid for a certain period of time.

If you don’t have a fully automated system, set personal reminders. For instance, set aside one morning a week where you go over your unpaid invoices. If a client hasn’t paid, don’t hesitate to send them a reminder. If you’re new to the world of small business management, this might feel pushy, but don’t worry – it isn’t. They owe you that money for your work, and you deserve to get it.

  1. Easy payment options

Finally, you need to make it easy for clients to pay you. This can depend on what your clients want. For some clients, it’s easier to mail a check. If your clients fall into that category, consider accepting checks.

For most clients, however, it’s easier if you make the process digital. There are all kinds of invoicing programs where you simply send the invoice over email. Then, the client clicks a link in the email and automatically pays the bill online with a credit card or through a payment processing service. The ease of payment can streamline the process. It puts the money in your hands sooner and thus safeguards your cash flow.

Creating invoice templates

There are a variety of resources to use for creating and customizing invoice templates. If you’ve never made a template or are looking to change yours up, check out these resources:

Many small business owners rely on invoicing to get paid. If your process isn’t the best it could be, you could be seriously harming your cash flow. Effective invoicing provides an ease of burden and positively impacts your cash flow. While it doesn’t guarantee clients always paying bills on time, it helps keep you out of the red until and after they pay.

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