Common Invoicing Pitfalls and How to Prevent Them
Invoicing is perhaps the least exciting part of owning your own business. You would likely much rather be doing the actual work that adds value to your customers instead of running through paperwork. However, invoicing is absolutely vital to your business: it is what keeps your cash flow in check and pays your bills.
Because invoicing is so vital, you should not only stay on top of your billing obligations, but you should invoice your clients in a way that will give you the most return on the time that you are putting into the process. It is no secret that you need to actually prepare and send the invoice if you want to get paid, but you can also take steps to ensure that the invoices you do post are more likely to be paid promptly.
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Some of the Most Common Problems with Invoicing
There is a method of invoicing that you can use to help create invoices that are more likely to get paid. That means that the client not only remembers to send your payment but that they are also willing to give you the amount invoiced because they received what they wanted or because the price is fair for what you put into the project. The following list includes the most common problems with invoices and how to avoid them:
- Poor timing – The best time to send an invoice for a project is right away after you finish it. If you have not already been tracking your time or products, listing them out is easier when they are fresh in your mind. In many cases, if you wait longer than just a few days after the project is over, you may forget to send the invoice entirely. Waiting too long could also push the project off your client’s radar as well. Putting a bill in front of your client quickly puts it on their list to be paid, which means you often get paid faster.
- Failing to itemize your charges – Clients want to know exactly what they are getting on an invoice. That usually means that you need to put detail in your billing that not only tells the client what you were doing but convinces them that what you did added value. You need to project your effort in your invoice—show your client why they are paying you and what you provided to them. You also want to itemize the invoice so that the client knows that you are only charging them for the tasks or projects that were discussed. Listing out every individual charge is sometimes time-consuming, but it allows the client to determine quickly that they are not being overbilled. In situations where you are invoicing for large items, having exactly what was sold on your bill of sale is vital for legal purposes.
- Not including terms on your invoice – It is a good idea to include the terms of payment that you require on your invoice. For example, if you expect payment within 15 days, be sure to note that on the invoice itself. Listing your standard policies regarding refunds or late fees directly on the invoice can also help everyone get on the same page as far as your terms and conditions. You can also use your invoice to explain any changes in your payment terms as well. It is helpful to give clients a warning before terms change, and including that information on one or two invoices prior to making that alteration can help you transition smoothly. You may also want to include a short description of how you want to be paid as well. For example, if you prefer checks to cash, state that on your invoice. You may even want to offer a discount for clients that pay you through a certain method.
- Using a manual billing system – Most billing systems today are tracked and stored electronically, whether it is by saving a copy of the electronic version or through a more high-end program. If you are still using a carbon-copy system for invoicing, you may want to consider making a change. Carbon copies are easy to lose and hard to retain. Having an electronic version of an invoice allows you to always have it on your computer or in your invoicing system. It is also easier to back up. By keeping electronic copies of your invoices, you can resolve any disputes about dates, times, or terms by referring quickly to the invoice; re-issue invoices to those who do not pay on time or need a reminder; keep copies for your own internal books and records; ensure that you have billed for all services or products; and determine when one bill stops and another begins. Electronic copies are also easier to search and organize. Having a bill of sale may also be legally required to transfer property or for tax purposes.
- Failing to follow up on late payments – Some clients need a push to get their bills paid. You should not let unpaid invoices linger too long. Clients may forget about them entirely if you do not send a reminder. You may want to make it a practice to send out a reminder just before or after the invoice deadline. Keep in mind that if you have late penalties or interest, you should actually enforce those terms. If clients know that you do not follow your own terms, then they are likely to just ignore them. If you have those terms built in, use them!
- Not proofreading before sending – When anything comes from your business to a customer, you are representing your company—and that includes your invoices. When you send out an invoice that has typos or the quantities or other values are wrong, that reflects poorly on your business. In cases where you are using a bill of sale to transfer goods, having a typo or other error can undermine the legal value of that particular document. It is a good idea to proofread your invoice when you create it and then set it aside for an hour or two and reread it. That way, you will look at it with fresh eyes. Taking a second look can also help prevent situations where you may inadvertently leave items off of the bill as well.
Preventing the Most Common Invoicing Errors
It is easier to understand some of the most common invoicing mistakes than it is to avoid them. However, you can use the following tips and information to reduce your chances of falling into common invoicing pitfalls:
Create Terms and Conditions at the Outset
When you establish a relationship with a client, it might be a good idea to give them a sale of goods agreement or general services agreement that states exactly what your terms are and how they will be enforced. You can set out things like:
- when payment is due,
- how goods will be shipped,
- what to do if products are late or if payment is late,
- late fees and penalties,
- expectations regarding how orders are processed,
- how disputes will be handled,
- whether there will be milestone payments as a project is completed,
- any guidelines or requirements that affect intellectual property, and
- confidentiality provisions or terms regarding trade secrets.
Having this type of document to govern the relationship will cut down on the overall disputes as both parties will be aware of what the expectations are and what will happen if they are violated.
Use a Numbering System
Tracking invoices can be very challenging. However, implementing a numbering system can help you easily find and manage every invoice that goes out your door. It is also easier to determine which invoices have been paid. Having numbered invoices will also be easier to use if you are audited.
Consider Using Incentives
When invoices are not paid on time, it can seriously disrupt a business’s cash flow. As a business owner, you count on those invoices to be paid so that you can pay your company’s bills as well. One of the ways that you can encourage your clients to make timely or even early payments is to use an incentive program.
For example, you may state that your terms are net-30, but if the client pays within 20 days then they can get 5% off of their total order. This type of incentive does cost a little off the top, but it encourages regular cash flow. It also helps you maintain a better relationship with your clients. Your customers may think that they are getting a deal by paying early (even if you have increased your prices by 5% to account for this type of incentive program). You can include these terms in your sales contract, or they can be periodically added to your individual invoices as needed.
Implement a Tracking System
While electronic billing is very helpful, you do not have to use it if you are uncomfortable with it. However, you should develop some kind of system that will alert you when a bill is due so you can follow up with the client.
That system could be something as simple as marking the calendar when you should be getting paid. It could also be a spreadsheet that you create with an invoicing program that will show you past-due invoices. Whatever you use, just be sure you utilize something. You should always know when to follow up with clients when bills are not getting paid.
Discuss Your Clients Bill-Pay Cycle
In some businesses—particularly larger companies—they will only process invoices at a certain time during the month or week. They may not be able to handle your weekly invoices until the end of the month, for example.
If you have large, regular clients, it might be a good idea to talk to them about what their process is for invoices. That way, you have realistic expectations when it comes to a payment timeline. It also helps you avoid offering incentives or discounts when they truly are not doing anything to get you paid faster.
Have Someone Else Review Your Invoices
You need to be very detailed and meticulous in your billing. In some cases, it can be hard to separate yourself from the project and the bill. Keep in mind that simply referencing a part of a project with very little explanation may make sense to your client contact, but it might be very confusing to their bookkeeping department.
Having someone else in your company review your invoices before they go out can help you catch things like:
- incomplete or confusing descriptions;
- quantity or pricing errors;
- typos, spelling, and grammar errors; and
- formatting concerns.
If you create your own bills, have your assistant look over them. You could also have an assistant create them from your notes and alter them, so they have enough detail that they make sense, and then you can review them. If you are a one-person show, create your invoice and then set it aside to examine a few hours or even days later. A little time apart from the invoice can help you see things with a fresh set of eyes.
Creating Professional Invoices That Work
If you are ready to create an invoice, LegalNature has you covered. We have a wide variety of some of the most common forms that businesses need. Check out our business legal documents that are tailored to businesses’ needs.