Getting paid what your company is owed may sound like a simple and straightforward endeavor, but the reality is that 64% of small businesses experience financial stress or struggles due to late payments. How can this be? As the makers of one of the most effective AR Management platforms, we’ve learned a thing or two from working with more small, medium, and enterprise businesses than anyone else. The two most important factors to cutting down your DSO and reducing the number of delinquent payments are called P&P: Proactive & Prompt.
Part One: Proactive Approaches
Clearly Define Your Payment Terms.
The best way to avoid a severely overdue payment situation is to be extra proactive about your payment terms and policy in the beginning. Accidental late payments can occur just from miscommunication or confusion about your net payment terms. Look at it this way, your vendor or customer likely works with numerous other businesses, 48% of which have Net30 terms, 45% have Net60 terms, and 35% have Net90 terms (source). Which one is your business? It can be hard to keep track! Most often, is an answer isn’t readily available, the business will simply put off the task of researching and finding out, resulting in inaction and late payment.
Don’t make it hard for your customer, especially a regular customer, to remember your payment terms. Include them in every invoice (more invoice tips here) and on your website. We strongly encourage businesses to have a Payments or “for customers” page on their website that contains payment and key contact information.
Over Communicate Your Payment Terms
When starting out with new customers, over communicate your payment terms. Mention it several times in your “sales” conversation. The logic here is that you’ll create a lasting memory with the customer (so they won’t forget your payment terms later), and you’ll subtly emphasize how important on-time payments are to your company. If you feel the relationship or conversation is important, you can even say exactly “on time payments are important to our success”. Don’t assume they’ll be able to understand your extended payment terms business model, especially if the supply chain ends with them (a B2C customer). If your business involves site visits, or personal deliveries of invoices, always leave with the reminder “now remember, payment terms are 30 days- take care!” Don’t worry about getting a response of “I know, I know!”- that’s the goal!
Send A Payment is Due Reminder
Hopefully, you’re using an AR management platform like the FG Receivables Manager, and can easily pull up a list of customers whose invoices are about to be due. With a few clicks, send them all the “your payment is about to be due” reminder. Over the years, we’ve found this can reduce the chances of late payment by more than 30%. This increases to 40% when the “Pay Now” button is included in the payment reminder.
If you are not yet using such a program, work with your AR department to generate a list of those “about to be due” customers, and send them a notice that their payment is about to be due. Include the actual due date, and remind them of your payment terms.
Part Two: Prompt
Alert Them, Right Away
Send a late payment notice as soon as the payment is past due. This can easily be done using the FG Receivables Manager “time past due” buckets, but can also be accomplished with your accounting software’s AR report. The most important thing is to not wait to run a full report to capture all late payments at the end of the month or worse, at the end of the quarter (gasp!).
For each company, send them a late payment notice as soon as their invoice is past due. This may seem like a lot of work, but if you stick with this prescription for just a few months, you won’t have late payments anymore!
Letting your customer know, right away, that their payment is late signals that 1) on-time payments are important to you and 2) that you’re actively keeping track (more tips on collecting late payments here).
On the off chance that your customer is late due to cash flow issues, knowing that you’re actively tracking and pursuing late payments will lead them to prioritize paying your invoice over others (who wants to deal with the hassle?).
Send Them A Reminder Every Step of The Way
If your customer still hasn’t paid after 30 days, you are officially dealing with a delinquent customer. The steps you take from here on out can only help you avoid the worst-case scenario (non payment). If you find yourself in this situation more than a few times a year, using an AR management platform is highly encouraged. Using effective wording and follow up techniques is of the utmost importance at this stage, because every week of additional lateness results in a significant decrease in the likelihood of repayment. As AR management experts, we have many resources and tips for resolving past due payments, but the number one approach is to send a payment reminder at each key stage (30 days past due, 60 days past due, 90 days past due, and 120 days past due). The email you send at each stage should be different, and involve an escalation of your tone. Communication throughout this process is critical, so you should make sure you’ve prepared responses to likely excuses, and are recording their payment promises for your records (and to remind them of, later).
If you’re at this stage of late payments, it’s important to have a late payment strategy. Get in touch with one of our customer service reps right away to get your AR department started with the FG Receivables Manager.