How to deal with unpaid invoices at the end of the year

The end-of-year period is a busy time of year for everyone, which means that making sure you’re paid on time can be particularly fraught.

Invoice too late or don’t follow up a client promptly, and an invoice that could have been paid in mid-December might not hit your business’s bank account until February. In fact, Xero research confirms that invoice payments are slowest in January.

That can lead to cash flow issues that can cause serious headaches for a business.

To keep the silly season from getting too stressful, here are some tips on managing late invoice payments across the end-of-year period.

Start soon

First things first: plan ahead.

Ideally, you’ll send invoices to your clients no later than Friday 6 December, which will give your clients two full weeks to pay before everyone takes off for the summer holidays.

But where possible, invoice even earlier.

“Don’t wait until December to start following up money from clients,” says Justin Mastores, partner at Rees Group. “Get on the front foot.”

“If you wait until 15 December, the client can say, ‘oh no, we don’t agree with that invoice’. Then it’ll go back and forth, and you won’t actually get paid until January.”

Davie Mach, client manager at Box Advisory Services, generally encourages his clients to have a three-month cash flow buffer, which will help see most through the dreaded December, January and early February period.

Mach adds it’s critical businesses map out their cash flow over this period, too.

“Business owners really need to know their numbers. A lot of businesses simply determine their profit by whatever number is in their bank account,” Mach says.

“But that’s not true at all. Businesses also need to know what’s going to come out of that account over the next couple of months, including any liabilities, taxes and expenses.”

Encourage timely payments

Sidney Cachuela, co-founder of POP Business, says establishing clear lines of communication is important. Make sure your payment terms are clearly outlined in the invoice.

“Both sides of the transaction need to be aware of their responsibilities,” he says.

Mach adds you can implement stricter payment terms, such as reducing the payment term from 30 days to 14 days.

Chase up late payments

Once a client payment reaches the overdue stage, it helps to have an automatic system in place that triggers a payment reminder notice.

If that fails, and you’re hesitant to send out a legal letter in fear of getting your client offside, Mastores says you can employ the services of an accounts receivable consultant or your accountant, to chase the payment up on your behalf.

Cachuela says: “Chasing up late payments can be awkward, and it can be hard maintaining a relationship if you’re forcing your customers to pay. A practical strategy is to outsource your accounts receivable function to a third party.”

Last-minute options

No-one wants to email a client to follow up an unpaid invoice only to get an automated out-of-office reply from your debtor boasting that they’re off skiing in Aspen.

If that’s the case, fortunately, you still have a couple of options up your sleeve.

“Within your business, you may find opportunities to decrease overheads and reduce expenses, which can assist through challenging times,” Cachuela says.

Mastores adds you can apply for a line of credit or a lump-sum short-term business loan, depending on your business’s situation.

“It’s important to research the right financing terms that suit the timeframe and your business’s serviceability to safeguard your business’s ongoing success,” Cachuela says.

Plan ahead for next year

Finally, here are five tips that you can start implementing in the new year to help your business avoid running into late invoice payment problems next summer holidays.

1. Accounting software: “There’s software that allows you to do regular direct debit payments that come out of the customer’s bank account automatically each month or year,” Mach says.
2. Do your research: “Conduct credit checks and background checks on new clients to make sure that they actually are good clients who will pay on time,” he says.
3. Upfront deposit payments: “Certain industries will charge 20 to 50% of the whole job upfront to pay for some costs to get started on stage one of the project,” Mastores says.
4. Retainer: “If you have ongoing relations with a client and know they’ll spend $20,000 year in, year out, get those clients on a regular monthly or quarterly retainer to smooth out the billing,” he says.
5. Prepayment discounts: “Offer customer incentives to reward early invoice payment. Structuring a reasonable discount can be beneficial for cash flow,” Cachuela says.

If stressing over unpaid bills isn’t how you want to spend your festive season, talk to me. We can explore cash flow options during the end-of-year slowdown.

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