A survey by the National Federation of Independent Businesses found that 40 percent of firms are receiving payments slower and being forced to increase payment terms. Clients are extending payment due dates; Net 30 days (meaning the outstanding invoice amount must be paid within 30 days) has turned to 60, 90, and even 120 days. The lags cause a vicious cycle: Firms that don't get paid in a timely manner in turn can't pay their own debts.
It's a new reality and, in some cases, agency terms will influence marketers choosing agency partners. Having a healthy credit line to offset cash variances and being vigilant about bookkeeping can help. Augment that with these strategies to help shorten the span between invoice issuance and payment.
1. Get it in Writing. It’s all about managing expectations. Sometimes we are so excited to take the work, project, or assignment, we forget to finalize the details. Outline the agreed-upon rate, the invoice schedule, and payment terms, including late penalty fees, before work begins. Put it in writing and get appropriate signatures.
2. Incentive vs. Penalty. The difference between a late payment penalty and a prompt payment discount is more about terminology than accounting. Both accomplish the same thing but convey a different message. Incent your customers to pay their invoice on Net 30 terms by offering a 5- to 10-percent discount on the invoice. You’ll be surprised at the power a small discount has on decreasing payment time. If your incentive policy isn’t working out as planned, you can also implement a late payment fee.
3. Payment History. Which clients are consistently tardy? Perhaps it’s time to call these offenders and advise them of a new late payment policy. On the other hand, are there clients that have been paying promptly for a year or longer? Send those clients a small gift to let them know you appreciate their business or consider extending a 10 percent discount on their next invoice.
4. Be Persistent. This is where attentive bookkeeping and a little more effort come into play. Don’t just hit send and forget about it. Email the invoice AND put a hard copy in the mail, particularly for those habitually late payers and first-time clients. Follow that up with an account statement within 20 to 30 days. Finally, add your bank details to the invoice—with electronic payments becoming more and more common, provide all the information a client needs right there on the invoice itself.
5. Get Personal. If email notifications and hard copy invoices/statements are not working, it’s time to pick up the phone; yeah, that’s right, be ready to take it offline and in person. It's a lot harder to withhold payment from someone you know than from a stranger. If phone calls don't work, make an appointment to personally visit whomever is in charge of paying you. Explain that cash flow is important to your business and mutually agree on payment terms that will work for both of you. Be prepared to compromise.
Don’t get frustrated by the extra work; remember, the payoff is cash flow preservation.