Managing your cash flow effectively is one of the most important things you can do to ensure the success of your business. However, actually doing it isn’t as easy as it may seem, especially if you have customers who never pay on time. Several studies show that accommodating late payments results in serious cash flow problems. So, no matter how well you manage your cash flow, if you’re not getting paid promptly, you’re at serious risk of running out of money.
Thankfully, there are lots of ways you can get customers to pay their invoices on time, without compromising your relationship with them. Here are some of the most effective:
1. Prepare a written payment agreement
Whether you just signed a new customer or are renewing a contract, it’s essential that there’s a written agreement between the two of you that summarizes the exact payment terms, deadlines, and other important payment details. Discuss it together to ensure there will be no misunderstandings in the future. You can emphasize the terms you have agreed on each invoice that you deliver, just make sure to choose your wording carefully.
According to a study from Freshbooks, clearer phrasing like “payment due within 20 days” makes it easier for customers to identify the payment terms compared to the phrasing “net 20”.
2. Have stricter payment terms
Offering flexible payment terms is a smart move if you want to keep your customers happy and guarantee that paying is always convenient for them. But bear in mind that this can lead to financial problems. There are some customers who are too stubborn and disorganised and will choose to not pay you on time no matter have flexible your terms are. So it’s advisable that you implement a stricter payment deadline. Even better if you can negotiate a shorter payment term - like 15 days - to guarantee that money will keep coming into your business.
3. Follow a regular payment schedule - that works for your customers
Like tightening up your payment terms, you also need to tighten up your payment schedule. For instance, send your invoices during the 1st and 15th of each month, make sure you stick to a schedule of sending invoices on those dates. This will not only help them with their cash flow management, but will also train them to make prompt payments a normal practice. As for the dates you choose? Most of your customers will have a scheduled payment date - this might be once a month and often is only for invoices received and processed 15 days prior.
Make sure you know what dates your customers process their payments plus the deadlines to make those dates, and time your invoices so you don't miss them. Otherwise, you can often find yourself waiting up to 60 days if you just miss the cutoff - waiting for the next cutoff then factoring in processing time.
4. Ask for an upfront payment or deposit
This works best for new customers or those with very large orders. Request that they pay half of the bill (or even a third) upon placing their orders and the other half upon delivery of the products. When you do this, you can guarantee that you’ll at least get paid in part before the due date, if not earlier.
5. Provide different payment methods
Just like you, your customers are also busy. Hence, it’s important that you offer them a convenient payment method so they can still settle their invoices on time despite their tight schedules. Go beyond the usual cash payments - it will be better for your business if you also accept bank deposit/transfer, Cash on Delivery (C.O.D), mobile and online payments (like PayPal), and payments through all major credit cards and debit cards.
6. Accept direct debit payments
Don’t have the time to chase late payments? Then this is the best strategy for you. What’s great with direct debit payments is they let you charge your customers automatically, on a regular schedule. So whether they’re too busy or forgetting to process payments (it happens, especially in the time-poor food and beverage industry) or you’re too swamped to remind them to settle their invoices, you can still get paid by the due date. Direct debits can be quite tedious to set up, though, since there are several processes and rules you need to comply with. To make direct debits easy and worth your time, make use of online tools or digital payment platforms like Ordermentum that can process direct debit payments for you, meaning you can avoid the bureacracy with organising it through a bank.
7. Send payment reminders regularly
It’s perfectly okay and accepted to send friendly reminders to your customers and asking them about payments. And not just the late or overdue payments - you can send a remember that the deadline is coming up. Make use of technology to set this up automatically so your customers are getting chased up in the background. An automated reminder from an invoice system also feels less pushy and personal and more like a regular, helpful bit of admin and they are very effective at getting payments in. There are plenty of digital tools today that are capable of reminding your customers when payments are due through a simple text message or email.
8. Switch to electronic invoicing
Among the most common reasons customers don’t pay on time is because their invoice came in late. By moving to electronic or online invoicing, these customers can no longer say their “invoice didn’t arrive” as it is always sent to them AUTOMATICALLY as soon as an order is placed - even better if they can log in and see it in a system in real-time. What’s good with modern online invoicing tools is they can send out payment reminders and can even link to digital payment systems, allowing you to charge your customers instantly. This is a win-win situation for you and your customers since both of you can finally focus more on your work. Xero (one of our integration partners) has a really exciting function where you can link your account to your customer's Xero account, which means your invoice goes straight into their system, listed in their accounts payable.
9. Adopt an ordering and payments platform
Dedicated ordering platforms like Ordermentum don't just let you accept retail orders and manage them from a single dashboard, they also help you get paid on time. Ordermentum has an “Instant Payments” feature that charges your customers automatically by credit card, direct debit, or depending on the terms you have agreed. Aside from that, Ordermentum can also take care of your invoicing. It can generate accurate invoices and send them to your customers electronically so you can finally focus on the other tasks that matter.
If you want to see more of how Ordermentum can help you get paid faster and how it can improve your cash flow, you can request a demo here.
10. Reward the customers who pay on time
One of the most effective ways to get customers to pay on time is to offer them incentives. You may choose to give them gift certificates as rewards or small product discounts if you receive their payments a before the invoice due date. Just make sure your incentive will excite your customers enough for them to make their payments on time. You can easily set up different discounts and pricing options for your customers in Ordermentum if you're using Credit Card or Direct Debit payments - those customers that switch to Direct Debit or Credit Card can have an automatic discount applied when their account gets charged - even if you have negotiated with them that the charge happens 7,10, 30 or any other number of days after the order.
11. Implement a late payment fee
Unfortunately, no matter how big your prompt payment incentive is, there will still be customers who won’t settle their invoices on time. The best way to deal with these kinds of clients? Charge them late payment fees. An additional cost of around 1.5% to 2% for paying late might be enough to get their attention and encourage them to pay on time. Incentives for early payments and fees for late ones work really well together to train your customers into paying on time.
12. Review your invoices regularly
By this, we mean monitoring and tracking all your invoices to identify which customers have or haven’t paid yet. You can do this manually, or if you’re too bogged down with admin tasks, you can adopt a digital tool to help you out. There are web-based systems (including most accounting software) that can immediately notify you who hasn’t paid so you can chase them straight off instead of waiting for them to get their payments in. Ordermentum provides this service with the new insights dashboard - instantly see who has and hasn't paid and anyone whose credit card or direct debit payment hasn't gone through, so you can intervene straight away.
Chasing late payments is a tedious task that no business owner looks forward to. It affects your productivity when you have to spend time and effort calling up customers to settle their invoices and it impacts your current cash flow position. The best way then to deal with this headache is by following the proven tactics we’ve listed above. Take note though that not all of these tips will work for all businesses, so it’s always better that you try a few different strategies to see which ones works well for you.
Know other tips that can get customers to pay earlier? Feel free to share them in the comments section below. Meanwhile, for more cash flow advice like this, you can visit our blog.