Managing Receivables: Importance of Promptly Invoicing Customers
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Offering credit and invoicing customers allows them to schedule payments efficiently, helps their cash flow, and in general, is valuable to customers. Offering credit terms improves customer cash flow, but it can adversely affect your cash flow, sometimes dramatically, if the accounts receivable generated by these credit sales are not managed properly.
A credit sale will appear as revenue on your profit and loss statement, but it will not contribute cash flow or appear on your cash flow statement until it is collected. In this way, companies can simultaneously show good profit performance while suffering cash flow crunches due to the difference between what has been billed and what has been collected. Since cash flow fuels the operations of a company, the differences between P & L and cash flow needs to be understood.
Reasons to invoice quickly include:
- Getting paid quickly – A billable event occurs when a product or service is provided to a customer on credit terms. The vendor may book the transaction price as revenue earned and as an account receivable – an asset on the balance sheet. That account receivable cannot assist your cash flow until it has been invoiced and paid. Therefore, any delay in invoicing a customer can negatively affect your cash flow.
- When your customers receive your invoices, some will need authorization from department heads, etc., or matched against purchase orders or other documents. The longer it takes for them to be invoiced, the more likely there will be delays in processing payments.
- Many companies issue payments periodically in batches or payment cycles. If you delay invoicing, you may miss a cycle, and then payment will be postponed until the next batch, further affecting your cash flow.
- Invoicing promptly creates an impression of thoroughness and professionalism for your company. Accounts payable managers get a feeling for vendors they pay frequently, which can impact who gets paid first when your customer has to allocate payments due to tight cash.
- Maintaining outstanding customer balances and the resultant delay in receiving payment is a cost. This cost may be explicit, as in the case of interest paid to finance inventory that was sold but not yet paid for, or implicit in opportunity costs due to slow cash inflows.
- Customers who order repetitively can accumulate significant charges, resulting in large invoice amounts. Billing these clients quickly can result in more but smaller invoices. Smaller invoices tend to be processed quicker and paid faster. Many companies require multiple approvals on large invoices, which can slow payment. Smaller invoices bypass this bottleneck.
- Finally, accounts receivable are perishable. Customers may be delinquent in payment for many reasons, such as temporary cash shortfalls, delays in processing invoices, and failing business. Experience has shown that, as more time elapses between providing a product or service, the less likely payment will be made.
Fortunately, there are a variety of quality, affordable accounting software packages that streamline the invoicing process and automatically generate customer statements and management reports.
Invoice your customers as soon as possible.
Some invoicing techniques that help to speed payment include:
- Clearly state that it is an invoice, not a statement
- Print the purchase order number, if applicable
- Print a payment due date, not “Due in 30 days.”
- If possible, include on the invoice the customer’s general ledger or budget code