How Contractors Can Get Invoices Paid On Time
As part of Solutions Review’s Contributed Content Series—a collection of articles written by industry thought leaders in maturing software categories—Garrett Wilson, the president and co-founder of FieldBin, explains the steps contractors can take to ensure they get paid on time.
When pressed, many general contractors admit their least favorite part of the job is selling. A close second, though, might be invoicing. Research conducted by MarketInvoice indicates that contractors lose as much as $19 billion in locked-up earnings annually due to late payments, non-payments, and outright refusals to pay interest fees. Late payments add to the contractor’s financial and administrative costs, hurt cash flow, damage business relationships, and fuel uncertainty. Dun & Bradstreet estimate that 90 percent of small business failures can be traced back to poor cash flow.
With that in mind, what can contractors do to ensure that their invoices are paid on time and that cash flow doesn’t jeopardize their company’s existence?
Invoice Payment Terms
While invoice payment terms are typically spelled out in contracts, they are often omitted when invoicing. This is a critical mistake since these terms not only state how long the customer has until the payments are due but also can offer incentives to promote early payments.
For example, specifying Net 30 on the invoice reminds the customer that the total amount detailed in the invoice is due 30 days from the invoice date. By adding a few numbers, contractors can show any discounts available for early payments. An invoice that specifies payment terms of 2.5/10 Net 30, for example, means that the customer will get a 2.5 percent discount if they pay the total amount within 10 days rather than 30 days from the invoice date.
Invoice payment terms should also specify how the payment is to be made, payment plans over time, and any late fees or penalties that may be applicable. If interest is due for late payment, that should also be noted.
Request Upfront Deposits
Requesting a deposit before starting work on a project is perhaps the most obvious way to ensure getting paid faster. Deposits ensure that the business has a steady cash flow to pay for materials and labor costs associated with a project. Cash flow will also help to cover overhead costs, including all indirect expenses related to running the business (rent, insurance, salaries, vehicle expenses, etc.). Upfront deposits are significant when undertaking a big project—anything that may take months, not days, to complete and will require a substantial outlay in material expenses before work begins.
Incentivize Early Payments
Regardless of what steps a contractor takes, some customers will inevitably pay invoices late. Research indicates that for every $10 million in annual turnover, a contractor can suffer losses of $115,000 in working capital if invoices are delayed by just three days. And chasing after late or unpaid accounts can be expensive and time-consuming, compounding the company’s productivity and profitability losses.
With that in mind, contractors can counteract the potential harm late payments can cause by offering incentives designed to prompt customers to pay their invoices early. Incentives can include anything from a percentage discount on the overall invoice to gift certificates or small product discounts for early payments.
How early contractors get paid by customers also depends on when (and how) contractors send them their invoices. Ideally, invoices should be sent immediately after the job is completed to improve the odds of getting paid on time. Increasingly, contractors are generating invoices on the spot by using invoicing software. Larger jobs with multiple workers, however, may require invoices to be sent from the home office. In such cases, sending the invoice to the customer’s email is preferable rather than using snail mail. Doing so will speed up the entire invoicing process and, hopefully, prompt faster payment.
Beyond the obvious, invoicing immediately after job completion makes it easier to process since the work is still fresh in everyone’s minds. The customer can easily track what is owed, budget to pay for it, and easily remember other details about the job, such as when they requested it and when the crew started handling it. The contractor, meanwhile, can more readily account for any deviations from the original work plan or additional work requested by the customer and include attendant charges in the invoice.
While some jobs may have a flat fee, the cost for most projects will vary somewhat from the original estimates due to unforeseen complications, additional work requested by the customer, and other issues which arise. With that in mind, contractors need to track the hours of every worker involved in the work. Doing so enables contractors to invoice accurately for the work they have provided. It also allows invoices to be generated quickly and for contractors to justify their charges. Over the long haul, tracking hours also enables contractors to bid on future jobs more accurately based on previous experiences with similar projects.
Hours can be tracked by using a work diary or mobile phone notes. If contractors are using invoicing software, they can use the time tracking feature for more accurate tracking. Regardless of the method used, time logs need to be accurate and preferably include a line-item description of services provided so that invoices will be precise.
Keep Invoices Clear and Detailed
When reviewing an invoice, customers should always be able to know what they’re paying for. But while invoices should be detailed, contractors must guard against providing too much information, making the invoice overly complicated to decipher.
To prepare and deliver a concise yet detailed invoice, contractors should settle on a basic format and technique for labeling work completed, materials used, and any additional fees or charges. Using a standardized invoice template, contractors can provide customers with a clear, well-organized summary of each project and reduce or eliminate questions regarding the costs.
Enforce Late Fees
Finally, contractors should enforce any late fees applicable according to the late fee policy spelled out in the invoice payment terms. Implementing late fees encourages customers to pay on time. However, it’s always a good idea to discuss the policy directly with customers before starting work to ensure there are no surprises when invoicing.
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