How to Invoice Customers & Protect Cash Flow

An invoice is simply a bill that sets the terms for payment(s) to be made after a good or service has been provided. Many businesses invoice customers, including professional services firms and wholesalers. Invoicing can be advantageous because it allows your customers an extended period of time to pay for goods or services. This may make your business an attractive option versus the competition. However, your cash flow can be put at risk if your partners fail to pay according to the terms of the invoice. Tweet This

When you write an invoice, your business is effectively extending credit. You might not feel like you’re acting as a creditor – after all, you’re just waiting for a payment. However, from a legal perspective, your business is making an unsecured loan. The customer has pledged neither property nor financial assets as collateral. If they default on the charges, then your business could be left empty-handed. Small business owners who fail to recognize this may be setting themselves up for a costly surprise.

How to Evaluate a Business

Before agreeing to invoice another business, it’s important to investigate the creditworthiness of the applicant. You can begin by requiring potential customers to fill out a formal business credit application. Many business owners ask for basic information about the company and its owners, along with recent financial statements to help verify the customer is likely to meet their financial obligations. You can also collect vendor trade references** and bank contacts to try and understand the business’s past payment behaviors.

Business credit bureaus such as Dun & Bradstreet offer a range of business credit products to help judge a company’s credibility. From trade references to bankruptcy filings and legal judgements, D&B collects voluminous amount of business information and from the data creates a business credit profile for each company in its database. The objective insights in a business credit profile can be invaluable to business owners seeking a clearer picture of a potential partner.

Before offering business credit in the form of an invoice, you also need to understand your tolerance for risk. Is your cash flow robust enough to keep you in the black if a customer is late or defaults on their obligations? If you decide the business meets your standards for extending credit, you can get to work drafting an invoice.

Creating an Invoice

A professional invoice contains much more than the amount due. Remember, you’re essentially making an unsecured loan to ease the financial pressure on the customer, who would otherwise have to pay immediately. Since you’re putting money on the line, it’s imperative that you provide an accurate, clear statement of the transaction and its terms. Don’t leave any room for confusion. Your invoice should include:

  • the date of the invoice
  • the goods or services provided
  • the amount due
  • the due date
  • early repayment discounts, if any
  • penalties, fees, or charges accrued in the event of a missed payment or default
  • a request to contact you immediately if a payment will be late or an error is found

The majority of invoices require payment within 30, 60, or 90 days. If you can afford a lower margin on the sale, you can attempt to motivate clients to pay early by providing a small discount for payments received ahead of the due date.

If a business fails to repay its debt in a timely manner, you’ll want to reach out to your sales contact as soon as possible. Debts that go unpaid can be reported to Dun & Bradstreet as a trade reference. An honest account of the transaction could help another business owner avoid an irresponsible customer.

By clearly stating your expectations alongside the responsibilities of the customer, invoices allow you to better protect yourself from delinquent accounts or bad business debts.

To learn more about how to manage your risk or your cash flow, visit our pages dedicated to helping you with each topic.

Photo Credit: justin_02, Twenty20