Managing Receivables: Importance of Promptly Invoicing Customers

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:

  1. Getting paid quickly – When a product or service is provided to a customer on credit terms, a billable event occurs and the price of that transaction may be booked by the vendor 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 have negative effects on your cash flow.
  2. When your customers receive invoices from you, some will need authorization by department heads, etc., or matched against purchase orders or other documents. The longer it takes for them to be invoiced, the more likely it is there will be delays in getting payments processed.
  3. Many companies issue payments periodically in batches or payment cycles. If you delay invoicing, you may miss a cycle, and then payment will be delayed until the next batch, further affecting your cash flow.
  4. Invoicing promptly creates an impression of thoroughness and professionalism for your company. Accounts payable managers get a feeling for vendors they pay frequently and this can have an impact on who gets paid first when your customer has to allocate payments due to tight cash.
  5. There is a cost to maintain outstanding customer balances and the resultant delay in receiving payment. 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.
  6. Customers that order repetitively can accumulate large charges and result 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 and this can slow payment. Smaller invoices bypass this bottleneck.
  7. Finally, accounts receivable are perishable. Customers may be delinquent in payment for many reasons such as temporary cash shortfalls, delays in processing invoices, failing business, among others. Experience has shown that, as more time elapses between the provision of a product or service, the less likely it becomes that 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:

  1. Clearly state that it is an invoice, not a statement
  2. Print the purchase order number, if applicable
  3. Print an actual payment due date, not “Due in 30 days”
  4. If possible, include on the invoice the customer’s general ledger or budget code

Author: Marc J Marin