invoicing & Credit Control for the small business start up
Not getting paid for the work that you do, or the products that you sell, is very common and you can, unfortunately, expect to have at least one major 'bad debt' in your business life.
At the moment the average 'payment days' in the UK on a 30 day invoice is 84 days and, despite the Government intervening with legislation it has not reduced significantly. Now before we get cross let's understand that to the buyer, as with you, CASH IS KING, and therefore if you give them any reason to withhold payment they will willingly do so.
Therefore it is important, at the very beginning while you are planning the business, to plan an Invoicing and credit control system that will bring your money in on time.
Tips on effective credit control:
If it's a large order (over £500 or so) and it is the first time you have dealt with the client, do a credit check through your bank and make sure they can pay. On the basis of this credit check give each customer a credit limit and DO NOT LET THEM GO OVER IT
Try to get a deposit, or 'sign of good faith' up front so they are less likely to back out halfway. This particularly applies to businesses where you have to buy in special materials, Graphic and Web Page designers, etc. You cannot imagine a builder saying "well I'll build your house and, when I've finished it, you can pay me if you like it" - BE PROFESSIONAL. You will often find that the customer who won't pay a deposit, won't pay at all.
Ask the client to sign a 'purchase order' agreeing what they want, when and how they will pay. This should also contain terms and conditions and cover such things as alterations from the original specification, quality standards and who measures them, etc. Also allow for invoicing 'stage payments' - huge orders that are payable at the end of the project can be devastating to your cash-flow and getting an overdraft means you're paying for the money the customer owes you.
As you complete part of a job invoice it. Do not wait until the end of the month - because if you write an invoice at the end of June and post it, they receive it in July and they will put it on the August cheque run so you get paid in September!! There's 65-70 days there even if they think they paid on time. Always invoice and make sure they receive it before the end of the month.
Make sure the invoice is accurate to the penny, otherwise they can pop it in a box marked 'query' and leave it there for a month before you chase it. Then they can ask you to send a new invoice and the whole thing starts again.
Try not to offer discount for early payment unless you have calculated it in and you know it will speed up payment. If you put it on the invoice most people will take advantage of it and still pay late - where do you go then?
Always have ROT (Retention of Title) on your invoice - "all goods remain the property of XYZ Limited until payment in full is received" - otherwise if they don't pay you, you can only sue them for the money. Whereas if you have ROT and own the product and you build them a wall and they don't pay you simply take the wall back, sue them for putting it up, sue them for taking it down and the materials involved (less what they are worth at re-sale)
Always have a 'payable by' clause on your invoice and make sure it is unambiguously linked to a date on the invoice. If you put all invoices payable 30 days and don't say when from they may say they thought it was '30 days from Christmas 2050". Therefore it should say invoice payable 30 days from date of issue of invoice, or something similar.
Wherever possible ask the client to sign a delivery note saying that they have "received the goods in full and in good condition" that way there are no arguments about what they had and if they broke it later or not.
When the invoice is due payment send them a polite reminder and possibly a telephone call.
When the invoice is overdue make a polite telephone call, or visit them. Try to develop a relationship with their 'purchase ledger' department. Don't be cross with them, they probably only work there and if you annoy them too much your invoice may go to the bottom of the pile. This may also happen if you try to be too smooth. Strike a balance between being personable (note I did not say personal) and professional. Make a note of the call and keep everything in writing in a diary format.
If there is still no response and you are becoming concerned send them a polite final demand saying something like "We have noted that invoice number 12345 dated 12/3/02 is overdue payment by 17 days. It is possible that this is an oversight on your part, however we must inform you that unless payment, in full, is received within the next 7 days we shall have no alternative but to take legal action for recovery. If you have made payment within the last 3 days please accept our apologies for this letter" - Most importantly, if you make a threat like this you must carry it through.
If there is still no money forthcoming see our Answers section for Small Claims Court. Complete the claim and, before registering it with the court, fax it through to them with a covering letter saying that unless you receive an immediate response you will register the claim with the Small Claims Court the next day - this has been shown to bring a reasonable response. You cannot sue them for 1 invoice you have to sue them for all the money they owe you so make sure you keep a close eye on their credit limit.
Still no response - SUE THEM! Forget it and get on with the business of growing your business. A lot of businesses fail because they have a reasonable sized bad debt which, with effort, they could trade through. However they become almost obsessive about getting that money back and, in the process, let the rest of their business slide.
Don't beat on the rest of your customers because one let you down. treat everyone as an individual but follow the same system for each.
Simple rules for Invoicing
Must have your name, address and contact details on it: If you are a Limited Company it must have the company registration number and either all of the Directors names, or none of them; If you are a Sole trader or Partnership it should have Harold Bloggs trading as Fastlinksolutions, or Sam Smith & Harold Bloggs trading as Fastlinksolutions Associates.
Should have a date of issue - to which you can refer the client if they have a query, Work out any overdue payment and refer to for Inland revenue purposes for your Tax
Should have a number, for the same reasons as above and - MUST have a number if you are VAT registered. The numbers must be sequential (1,2,3,4,5,etc) and, if you mess up an Invoice write VOID across it and keep all copies of it in your book-keeping book. If you are VAT registered and lose an Invoice Customs and excise will not be happy.
Should have the Name, Address and Contact details of the customer
Must have your VAT registration number if you are VAT registered.
Should have ROT (Retention of Title) on your invoice - "all goods remain the property of XYZ Limited until payment in full is received" somewhere prominently
Should have payment terms - relating unambiguously to a date on the invoice.
Should have description, quantity, unit price and total of the goods or services you are providing
Must have the VAT rate (Zero, 5%, 17.5%) which applies, if you are VAT registered. In addition it should clearly show what the NET, VAT and GROSS amounts of the invoice are.
Finally - Here is an example of a typical VAT Invoice