If you run a small business, you’ll know that controlling cash flow is one of your most important management tasks. But, keeping cash coming into the business means ensuring your customers pay you on time — and that’s not always easy.
Sometimes, customers just forget the due date for payment, but other times they may just be reluctant to pay on time. They might be trying to protect their own cash flow by delaying payment or they may have a problem with your invoice which has to be resolved.
Whatever the situation, you need to monitor payment dates carefully and take action quickly if customers haven’t paid by the due date.
In this article, we outline some polite ways to remind your customers about payment without potentially damaging relationships. But, we also cover some of the options available if you don’t get a satisfactory response. And, we take a step back to consider how to streamline your invoicing, monitoring and collection process so it requires minimal intervention to get paid on time.
When payment becomes due and you haven’t received the money, the first step is to contact the customer to remind them that payment is due. You may decide to wait a couple of days in case a check or other type of payment has been delayed, but after that you must take action as quickly as possible.
There are a number of polite ways to remind the customer when you contact them by mail or email.
Sending an email as a reminder is a quick and convenient way to jog your customer’s memory. Your email should be polite, but firm. To make sure that the email is effective, there are a number of steps to include:
If you don’t feel comfortable sending a personalized email, use an automated email from your invoicing program. You can set a schedule for issuing reminders automatically when payment is not recorded on the program.
The reminder will only include basic details such as invoice number, amount, due date, customer reference or purchase order number and payment details.
Although this type of communication is impersonal, compared with an individual email, your customer may feel less embarrassed and more willing to respond.
If you don’t receive payment or any kind of response to your reminder, it’s important to follow up quickly. Here is an example of a polite follow-up.
However, if you still get no response, you should follow up again but, this time, the communication doesn’t have to be so polite.
Although it’s easier to make contact by email or letter, sometimes a phone call can help you secure payment. Unlike emails, customers can’t claim they haven’t received your communication if they answer your call. When you call, there are a few useful guidelines to follow.
If your reminders and follow-ups don’t work, you have a number of options:
If you intend to charge interest, you must notify your customer in writing of the amount of interest – x% and the charging period – x% per day/per week/per month.
Although you may only consider charging interest when you find that payments are overdue, it’s good practice to make customers aware of every invoice, rather than trying to impose the charge after the event.
Offering a payment plan can be useful if you are trying to recover a larger overdue payment. You must set out the terms of the payment plan clearly.
Collection agencies can take over recovery when you have exhausted other methods. They contact the customer and make arrangements for collection of the full amount or part payment.
In return, they retain a proportion of the invoice amount as their fee. This means that you will receive less money in total, but you have an assurance that you will have incoming funds to maintain cash flow.
An independent mediator joins the meeting between you and your customer and offers suggestions on the best way to move towards an agreement. The mediator also ensures that the meeting is fair to both parties and is conducted in a respectful way.
Mediation does not offer any guarantees that you will receive payment. However, it may help you and your customer come to a mutually acceptable agreement on part or total payment.
Suing a customer in a small claims court may seem like a step too far, but it may be the only course left if all other approaches have failed. Before you consider making a claim, make sure that the amount you want to recover is within the limits set by the courts in your area.
The local court may also require you to send the customer a demand letter setting out your intention to sue before they allow the claim to proceed. The demand letter should include a request for payment, together with details of the work, a copy of the invoice, payment instructions and a statement of your intention to sue if they do not settle payment within a specific time.
The detailed approach for making small claims and information on local court regulations is outside the scope of this article, but you’ll find a useful guide here on collecting outstanding invoices.
Reminders and other actions are essential when customers forget or fail to pay, but you can take proactive action to reduce the risk of late payments. By issuing upcoming payment reminders, you can help customers plan their own payment schedules.
Depending on your payment terms, you can schedule a series of automated reminders.
If you find you are regularly encountering late payments, it may help to clarify your payment terms and include information on any discounts or penalties for late payment.
Making your terms clear on each invoice will ensure that your customers are aware of their obligations for payment. Offering a discount for early payment will help your cash flow, while stating the charge for late payment will encourage customers to pay on time.
Although you may have to take action to remind customers or recover your debts, you can avoid problems building up by taking a streamlined approach to invoicing, monitoring and collection.
With a system like Plutio, you can automate many of the important stages:
With invoicing and collection under control, you can manage cash flow more effectively and ensure that your business remains viable.