Managing cash flow is a challenge for every SMB, especially when you’re operating in B2B markets and dealing with a smaller number of larger payments. The risks are more significant if each invoice becomes critical to cover your expenses.
A lot can – and does – go wrong when managing cash flow. In fact, research shows poor cash flow management is the leading cause of small companies going out of business. Getting paid on time is one of the most important factors to ensure this doesn’t happen to you.
You put in the work and provide your services on credit. The least your clients could do is pay you on time. However, there may be many reasons why you’re not getting paid on time beyond just a client’s financial struggles.
We’ve compiled a list of the main reasons for late B2B payments and tips to help your business in the future.
Inflexible payment options
A range of payment options are available nowadays, and sticking to just one or two that suit your business can complicate things for your clients. Additionally, each payment type has an inherent delay depending on how the funds are transferred. For example, checks require the payer to send the recipient a physical piece of paper.
To speed up the entire process and move away from paper documentation, many businesses are switching to electronic funds transfers (EFTs), particularly ACH. What is ACH, (and what is an ACH withdrawal), you might ask? It stands for Automated Clearing House, a method of transferring funds digitally that is quick, convenient, safe, and often free. The typical payment time using ACH is also short, around one business day.
Another reason for late payments could be invoice issues on your end. Problems include:
- Missent invoices: Sending the payment instructions to the wrong email address or the incorrect person or department at the client’s company. Make sure you use digital invoices wherever possible so that if a problem occurs, you can quickly trace the issue and send out a new copy.
- Missing or incorrect information: After the invoice has made it to the right person, make sure it has everything they need to approve the payment. Bear in mind each client may have different requirements as to what they need. Ensure you have robust accounts receivable processes to deliver accurate and timely invoices. Basic invoice requirements typically include:
- Your business name and contact details (address, etc.)
- Client’s name and address
- Invoice data
- An itemized list of products and services with subtotals and descriptions where necessary
- Due date
- The combined total of the final payment
- Poorly written invoices: Sometimes the invoice contains everything it needs but is poorly written or formatted, creating confusion on the client’s end. While you might want to make your invoices unique, often it is better to take advantage of the many clear and concise templates available.
Unclear net terms
You need to define your net terms when offering products or services on credit. These describe the payment details by which you will get your money, including the time frame and consequences for late payment.
Problems quickly arise if you do not set out agreed-upon net terms at the start of the working relationship. Ideally, get something in writing to prove everyone is aware and agrees to the net terms before providing your services.
The most common net terms are Net 30, Net 60, or Net 90, which unsurprisingly correspond to being paid within 30, 60, or 90 days respectively. To help their own cash flow, most customers maximize their payment window, sending funds in the last day or two.
This can be frustrating, and many businesses encourage early payment by offering discounts. Examples include terms such as “1/10 Net 30,” which says a company has 30 days to pay the invoice, but if they pay within ten days, they will receive a 1% discount.
Failing to enforce late fees
If a discount for early payments is the carrot, then late fees are the stick. Perhaps the most effective way to get clients to pay on time is to enforce a financial penalty for late payments.
Before adding late fees to your payment terms, you first need to do some research and determine how much you can legally charge. In the US, the maximum interest varies from state to state. Generally, a fee in the range of 1-2% monthly interest should get your clients to pay up.
After you’ve decided to charge late fees, you need to inform all of your existing clients, make any new clients aware before signing a contract, and add the policy details to your invoice payment terms. The information regarding late fees should be clear and written in simple language.
Once late fees are in place, ensure every client is aware of the final due dates for future payments and send invoices promptly so they have as much time as possible to organize their own cash flow and make the transaction. When a client is late on a payment, follow up immediately with a reminder containing the invoice details, final amount, and the late fee terms.
If the client doesn’t pay for an extended period, you should get legal advice and send revised invoices each month with the late fees accrued up to that point.
Finally, a common reason for not getting paid on time is a client disputing the invoice details. Ensure the pricing is made clear before starting the business relationship, including the price per unit or the hourly rate of staff involved. Try and provide accurate estimates to minimize disputes, and if the price rises for whatever reason, convey that information to the client promptly.
Using technology to automate and track your accounts receivable
A great way to get paid on time is to incorporate technology to oversee and automate your accounts receivable processes. Software is now available that syncs with accounting software to track and manage payment requests, including various payment methods.
With technology on your side, you can make getting paid as simple as possible, eliminating mistakes while reducing admin tasks to improve your cash flow management and keep the money rolling in on time.