Unpaid and late invoices place a financial strain on many smaller contractors. Many small businesses ultimately fail because they extend credit, but are underpaid, or never paid.
Unpaid and late invoice payments can have several causes. Sometimes customers have a legitimate reason for not paying an invoice, like unfinished work, or work that doesn’t pass an inspection.
Other times customers themselves become over-extended, often through change orders made along the way. Still, a simple clerical mistake can cause a delay in getting invoices paid, because an address, name, or other basic information is incorrect on the paperwork.
Often, miscommunications can lead to a late payment. Simple, yet completely avoidable, mistakes can occur that can derail a company's finances. The solution to avoiding late and unpaid invoices is often as simple as clear and consistent communication with the customer.
Read on to understand the impact of unpaid and late invoices on your business and share strategies to protect your finances from this financial risk.
Chronically late invoice payments can doom a company’s profitability and even its very existence. Understanding how to collect an unpaid invoice can boost a company’s bottom line and often begins by replacing an outdated invoicing system.
Invoice management is among the most important functions any business can perform. It doesn’t matter how great our work is if you can’t get paid. If you cannot manage cash flow and accounts receivable, you won’t be in business very long anyway.
Late vs. unpaid invoices
Late invoices happen when customers don't pay on time, causing cash flow disruptions and necessitating reminders. They are still on the books as accounts receivable, with the hope that eventually the invoice will be satisfied.
On the other hand, unpaid invoices represent a more substantial risk as they mean customers haven't paid anything at all, potentially leading to financial strain. The cause can be any number of things, like dissatisfaction in the work, deceptive practices, and miscommunication. Generally, if an invoice is not satisfied within 90 days of receipt, most accountants would place it in the unpaid category.
The impact of late and unpaid invoices
Neglecting late payments can hurt businesses in many ways. First, it messes up the money, making it hard to pay bills. To cover the gap, you might have to borrow money, which can lead to more debt and extra costs.
Unpaid invoices can also strain relationships with suppliers and mean you miss chances to grow. You might have to make tough choices, like delaying projects or cutting costs.
Top strategies for preventing late invoice payments
Preventing late payments is often done through clear communication, accuracy, and offering convenient payment methods.
Here are a few practical tips for avoiding late payments from experts in the accounting field and experienced business owners. Generally, you’ll want to implement any of these practices you don’t currently use. Together, these practices can transform your way of invoicing.
1. Have clear and detailed contracts
Having a clear, easy-to-read agreement or contract is the most effective way to avoid late payments. The most successful contractors even sit down with the customer and explain every detail the customer wants to know.
Customers generally pay invoices they understand. Laying the stage for clear communication should begin with the initial meeting with the customer.
2. Set clear terms
Surprises are rarely a good thing in the construction business, so having a clear understanding of the terms goes a long way toward preventing late invoices.
Most customers don’t like open-ended contracts. Many are apprehensive when the total at the bottom is left blank. Setting clear terms, schedules, and payments is the best way to avoid confusion and late invoices.
3. Offer incentives
Offering rewards for paying the invoice on time is a smart move. It encourages clients to pay promptly, which is important for everyone involved. Timely payments help keep projects running smoothly without any hiccups.
4. Send invoices promptly
Probably the easiest thing you can do as contractors to help avoid late invoices is to send them out promptly. There’s little excuse for blaming a cash flow problem on an invoice that fell between the cracks. Charging invoice late fees for a delinquent invoice is a poor practice when the problem is the contractor’s outdated invoicing system.
With modern software solutions, this is one of the easiest tasks to perform. Reminders, alerts, and other communications are ever-present with effective invoicing software, helping avoid unnecessary invoicing delays.
5. Offer convenient payment methods
Some customers can pay with cash, but construction projects can involve large numbers. If you accept online payments, you essentially open a new market for business.
Some contractors even offer terms, but the majority prefer the instant payment credit card guarantee. The fees paid to the credit card company can be significant, but getting paid instantly can have more pros than cons.
6. Consistent follow-up
Like prompt invoicing, you can help avoid late payments directly by just following up with the client. The smartest contractors begin the follow-up long before the invoice even comes due. That way if there is a hiccup somewhere, a clear line of communication has already been established.
7. Implement late fees
Typically used as a last resort, some contractors take a more proactive/aggressive approach to avoiding late payments. It makes clients more likely to pay on time because they don't want to pay extra fees. Late fees also help ensure that payments are received promptly, contributing to better cash flow management.
8. Invest in technology
By far, the easiest way to use each and all, of these tools is to invest in technology. Invoicing software applications have evolved in recent years and are very cost-effective to own and operate.
How to address late or unpaid invoices
Addressing late or unpaid invoices in a friendly way is often the easiest method. When anger and frustration enter the situation, it often indicates a breakdown in communication.
Communication is key
Establishing consistent and frequent communication with the customer can make all the difference.
For example, if you’re in consistent contact with the customer you’ll likely know in advance of any major issues that could cause a late payment. You can avoid the late payment altogether by identifying, addressing, and resolving any potential issues before the invoice is even sent out.
Start with a friendly reminder to the client as soon as the payment due date has passed. Politely inform them of the overdue invoice and request immediate payment. This initial contact may resolve the issue without any further action.
Offer payment solutions
Life happens to all of us. Customers with the best planning skills and intentions can still experience a disaster that prevents them from paying an invoice on time. Suggest spreading the outstanding balance over several payments if feasible. Offering other payment solutions is a great way to preserve a relationship of trust and understanding.
When to escalate
Conversely, sometimes customers prefer to make their problems your problems too. Through carelessness or malice, some customers aren’t worth keeping, so you have to take the next step.
If you're unable to resolve the issue on your own, you may opt to hire a collection agency. These agencies specialize in recovering unpaid debts but typically charge a percentage of the collected amount as their fee. However, the most successful contractors consider this step a last resort when all other methods have failed.
The role of technology in invoice management
Advances in technology have made invoicing fast, easy, and accurate. Modern invoicing software does in seconds what a team of project managers may need a week to accomplish.
Businesses that leverage these technological advancements can streamline their invoicing processes and enhance their overall financial management.
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Invoicing software eliminates the need for manual entry, reducing the potential for costly mistakes and ensuring that clients receive accurate and error-free invoices. The software performs calculations automatically, including subtotals, taxes, discounts, and the final invoice total. This removes the risk of calculation errors that can occur during manual calculations.
Modern invoicing solutions reduce the time and costs associated with printing, mailing, and manual data entry, plus they are received by the client instantly. Payments can also be made electronically, so getting paid is much faster.
One example of the convenience invoicing software offers is the ability to access and make changes from anywhere. Contractors can create and send invoices directly from the job site using mobile apps. This speeds up the billing process and ensures that work completed on-site is accurately and promptly invoiced.
Notifications and reminders
IInvoice software can track the status of invoices, indicating whether they have been sent or paid. Automatically sending out a reminder for an unpaid invoice is often all it takes to get the invoice paid. Most customers want to pay an invoice on time, but simply forget to pay the bill.
Analytics and reporting
The larger a construction company becomes, the more important analytics and reporting become. The key to using the information is accessing it quickly and securely. Invoicing software tools allow businesses to gain insights into their invoicing and payment trends, helping them make informed financial decisions and optimize their cash flow.
For growing construction companies, scalability is critical. Invoicing software solutions are completely scalable to grow along at the same pace as your business. Invoicing solutions exist to make invoicing easy, regardless of how many your company generates.
Effective invoice management is the key to profitability
Learning how to collect late or unpaid invoices has no downside. Good communication, eliminating avoidable invoicing mistakes, and flexibility can take your accounts receivable to the next level.
Ready to streamline your invoicing process and boost your business's efficiency? Sign up now for a free trial with ClockShark and experience the benefits firsthand. Simplify billing, reduce errors, and get paid faster – all with our user-friendly platform. Don't miss out; start your free trial today and take control of your finances!