Over the past few 10 years, days sales outstanding in the technology sector has been increasing. Those in software and technology know that their sales cycles tend to take longer and their contracts and payment terms tend to be negotiated over for long periods. This all factors into the issue of getting paid on time. Factset, a software and tech company for investment professionals, has found that over the last 10 years the DSO in the technology sector has steadily grown by 10 percent. This shows that this industry is moving backwards in their accounts receivable practices.
Luckily, there are a number of tools and techniques you can use start getting paid faster, improve cash flow, and grow your business.
The longer you take to bill a client, the longer it will take them to pay you. Beyond creating the invoice and sending it ASAP, make sure to send not only a hard copy, but an email version of the invoice as well; this way you can get the invoice to the customer faster, giving them more time to pay it.
DON’T IGNORE AGING RECEIVABLES
Many of your customers are just as busy as you are, so if they are approaching or if they are beyond the due date, let them know! Sometimes all they need is a reminder. Consistent contact will keep your invoice from being forgotten and gives them every opportunity to ask you questions or bring up a problem keeping them from paying you on time. This can be time consuming though and often gets pushed to the wayside, so you may want to consider email communication automation to ensure this important task gets done.
CONSIDER LATE FEES ON DELAYED PAYMENTS
This will entice customers to pay you on time and if they continue to go beyond terms, you stand to make additional money on the interest fees. You could also consider requiring customers to put a credit card on file that you will charge if they do not pay on time. These solutions are not suitable for every company or situation, so use your discretion.
REQUIRE A DEPOSIT BEFORE YOU BEGIN WORKING
A deposit of 10% is standard and gives you a little more money in your pocket as you might run into more hours needed on the project and while you work on collecting the rest of the invoice from the customer.
OFFER RECURRING PAYMENTS
Recurring payments allow your customer to enter a credit card or ACH payment on file and the payment will automatically come out each month. This can be done by implementing an online payment portal that is PCI compliant. Often times you can set up a payment portal that is serviced by a merchant so the responsibility of storing the payment information is not on you.
ASSESS CUSTOMERS FOR CREDIT RISK
Be more careful about who you do business with by running credit checks or requiring new customers to fill out a credit application. For repeat customers, take into consideration their past payment history. If a customer who was once timely in payment begins to slip, they may be having some financial issues you need to investigate.
COME UP WITH A CREDIT POLICY PLAN
Pay closer attention to contracts;get help with setting up initial documentation by a lawyer. Going to court should be a last ditch effort and can significantly damage your relationship with the customer, but if you must take this route you’ll want to ensure that your contract and payment agreements will stand up in court.
While these practices can and will help you reduce outstanding receivables, you’ll always have a few slow paying customers that must be dealt. The way you handle these customers and the conversations you have will seriously impact your current and future relationship with them. What do you say to customers who are past due? When do you say it? These are important questions to consider if you want to maintain healthy customer relationships throughout the invoice collection process.