Closing past due invoices is a challenge any organisation faces, given how ‘business’ is conducted these days. Though a business owner may reach cloud nine at the start of the month due to an influx of orders, delays in client/customer payments towards the end of the month can result in a massive reducing of cash flow. Such a situation gives the business owner a nosebleed in covering operational expenses and hurts new investment plans.
An organisation might be excited at the beginning of a recent quarter, given the volume of business conducted. Still, it takes experience to know that even though everything looks bright on paper, the pressure faced concerning closing payments is the reality of life in a business.
Did You Know? Before the Covid-19 pandemic, prompt invoice payments declined by 23% in India towards the end of 2019. However, at the height of the pandemic, the figure in India fell by over 40%.
Effective Measures to Close Past Due Invoices
The need for a sustainable process in ensuring clients/customers provide their end of the deal is all the more apparent now. Additionally, an organisation has to go through difficult times to ensure collections from clients without spoiling these relationships that are critical to any business. Here are key measures an organisation can take to manage the closure of past-due invoices.
How to deal with Past Due Invoices
The most common way of dealing with due invoices is to send reminders to clients through professional email. In cases when such polite notice does not work, and it is evident that the buyer is not going to pay back, it can be time to take legal steps. Let us check some of the effective ways to close Past Due Invoices.
1. Understand the Customer
A business’s cash flow is dependent on the closure of payments. So it makes sense to assess a customer’s creditworthiness by completing a credit check before onboarding them. If late payments come to light, the organisation should reduce the duration of the invoice term for the concerned customer. Also, assess past payment practices from a reference that has engaged this customer in a business relationship. However, for existing customers, be diligent about flagging missed payments with polite reminders concerning payments. Go directly concerning late payments but do not provoke customers.
2. Establish Well-Defined Payment Policies
Ensuring customer payments begins with putting in place the right payment policies from the word go. Make sure clients understand timelines associated with payments, penalties for delays and interest to increase over a period of time on invoices that remain unpaid. Before entering into business with customers, the organisation should specify the following:
- Payment schemes
- Policy on delayed payments
- Discounts on early payments
- Policy on credit
- Policy on paying in installments
Make sure customers receive these terms in writing, as this will be beneficial if the organisation uses it for legal action.
3. Collecting Payments in Advance
Organisations generally prefer to collect payments in advance of services delivered as this approach does away with the issues arising from delayed payments. Another approach organisations rely on is requiring the customer to pay 50% upfront and the rest at a mutually agreed-upon date. These approaches alleviate the risk associated with non-payment.
4. Timely Transmission of Invoices
For an organisation to receive timely payments, the right efforts have to be made to send invoices on time to customers immediately after the service or product is delivered. Such a practice increases the chance of a timely payment. Organisations must send the invoice to the right person and the correct details. Personnel in charge of the collection must verify email addresses, the due dates for payment and other specifics such as purchase order numbers, etc.
5. Offer Flexible Payment Alternatives
Organisations receive payments quickly when customers find making the payments easier. Companies should not only require payments via cheque and cash and should provide multiple payment alternatives as customers might prefer other payment methods in today’s digital world. Other payment methods include mobile payments, debit cards, credit cards and direct bank deposits. Organisations should also allow customers to schedule automatic payments for transactions that repeat.
6. Provide Discounts on Early Payments
Organisations should provide customers with the option of taking advantage of discounts on early payments as savings on costs draw clients to pay immediately, thereby boosting cashflow. Such an approach also fosters loyalty among customers over the long term.
7. Send Reminders for Payment
Tackle overdue invoices by dispatching reminders for payments to customers. This approach is useful, especially when customers have not kept track of the due date on invoices. Send an email containing the details of the transaction – payment amount, payment terms and the organisation’s policy on late payments. Attach the invoice and provide multiple payment alternatives in the email to speed up the process.
8. Calling Customers and Following Up
If payment reminders have not had the intended effect, personnel in charge of collection should then call up customers as part of a follow-up routine. Being professional and polite will help in not isolating customers. Put a stress on the value generated from the organisation’s work and emphasise the fact that the organisation values its partnership with the said customer.
9. Provision of Credit
As an organisation works towards getting customers to release payments, it might be essential to investigate whether the client is facing a challenging financial situation. The organisation can permit payment in installments and postpone the deadline to ease the pressure. Accepting partial payment is another approach, where the organisation then presents a payment plan for the remaining amount.
10. Fines for Late Payment
An organisation can impose a fine for late payments to discourage customers from making late payments. However, the organisation should have specified the demand for late fees in the payment policy. The organisation should set the charge of late fees in the invoice. Organisations charge a percentage of the transaction while others impose a flat fee on the customers.
11. Legal Recourse
Legal Recourse is the final resort of the organisation on unpaid invoices. If all the above measures have failed, the organisation has to take legal action on outstanding dues, especially if the amount to be recovered is expensive and cannot be written off. If the invoice's value is nominal, the organisation can write off the debt and end its business with the said customer. In the case of resorting to legal action, organisations should seek the help of legal professionals. Such activities serve as a precedent for the organisation and customers concerning non-payment of products or services rendered.
Unpaid past due invoices can potentially hurt ties with clients or customers and dry up the organisation’s cash flow. Managing the process associated with invoices is easy when the organisation follows good business practices. When dealing with unpaid invoices, dispatch reminders and call the customer as part of a good follow-up routine. Assess the customer and the business's situation before providing credit, charging a fine for late payment or resorting to legal recourse.
A key part of successful closure of unpaid invoices remains setting the right expectations at the start. Investigate potential customers about their credit records and obtain references before getting these clients on board. The organisation’s policy should list discounts for early payments and late fees, among other payment terms, before onboarding. Ensure the organisation has access to essential data to facilitate the correct tactical and strategic approach when required.
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