How to Get Paid on Time

Stefanie O'Connell, a small business owner, recently wrote about depleting her emergency fund in The Growing Pains of Business Ownership. She writes:

Though my earnings have climbed exponentially over the past two years, I found myself this Friday transferring the last of my emergency fund savings into my checking account – just enough to cover my near-term expenses. Despite successfully maintaining my savings through the financial crisis, unemployment and years as a part-time actress, part-time babysitter, my back-up balances have now dwindled down to nothing.

Invoices are out, but payments have yet to come in. Meanwhile, bills are still due at their usual times and my expenses are up in order to maintain my new business growth.

Since I have worked with accounts payable in some format during my entire career as an accountant, I’ve decided to provide a few tips to help Stefanie and others like her get their invoices paid on time.

First, you need to understand your client’s payment processes. Here is how invoices are paid at my company:

Every invoice must be approved by a department manager before it can be paid.
The payment process at my company is sped up substantially if you can get your invoice into the hands of the person authorized to approve it as quickly as possible. If it arrives in accounting without a purchase order number listed or a name or the location of the person who ordered your product or service it could sit in accounting for days until we determine who needs to approve it.

Securing a purchase order number is not required but is important:
Not only does a purchase order number help identify who placed the order, but having one means your service or product was pre-approved. If the invoice price matches the purchase order price the department manager should easily be able to approve your invoice and forward it to accounting.

We pay in 60 days:
Yes that is correct - 60 days. Regardless of your terms, unless you are a phone or utility company, charge us late fees or interest, offer a discount for early payment, won’t ship future product unless we comply with your terms, or are one of our top six major vendors your invoice won’t be paid for 60 days. (During the recession it was 90 days. Currently our owner would like it to be 45, but at the moment we don’t have the staff to process fast enough). We do make exceptions for freelancers and sub-contractors which we pay within 30 days. We also honor progress payment deadlines for major purchases and projects if we have approved invoices.

Who determines when an invoice is paid?
In my company it is the controller.  The person who ordered your service can request we pay you quicker, but he has no authority to make that happen and has been instructed not to make promises or negotiate with you.  They can try to go around the controller to our President, but the President almost always sends them back to the controller.  Neither the President nor the person who contracted with you know what other financial commitments and obligations are pressing.

We haven’t paid you because our customer hasn’t paid us:
For large products or services we resell to our customers we don’t pay you until we are paid. If we are slow invoicing our customer or receiving payment from them this could be what is holding up your payment. Many companies do this – it is called managing cash flow.

A friend who owns her own business refuses to work with a large company in our area because they utilize this practice when paying their subs. She wasn’t getting paid for 60-90 days, but still needed to pay her employees their weekly payroll check. Once her business was well established, she stopped working for this company.

We require a W-9 form be completed before we will issue a check.
This is an IRS form we need on file to prepare your 1099 at the end of the year. We have discovered if our vendors don’t fill this form out prior to us issuing them a check we struggle to get them. If you don’t know how to fill it out yourself have your accountant provide an unsigned master copy. Then make photo copies of it, sign and submit to clients as needed.

When checking our credit references you should hear good things about us:
Remember those six major vendors we pay in 30 days, they are who we list as references on our credit report along with a company whose owner was once an employee of our company. We pay him in 70 days, but when contacted about payment (especially during the recession when we stretched payment to everyone) he always said good things about us. If we get feedback that a vendor has indicated we are a slow payer we remove them from the list. To get a more accurate indication of our payments check our Dun and Bradstreet report.

Also on a side note, our credit manager does not respond to 95% of the requests he receives on behalf of our customers. He doesn’t want to be put in the situation of angering or lying for a customer, so instead says nothing.

If we haven’t paid you in 60 days we most likely don’t have your invoice.
Send statements. I recommend sending one to the person you contracted with and to accounting. If accounting doesn't have your invoice we will request a copy. We then follow up with the department manager. Occasionally they are holding your invoice because they are not satisfied with your work, but most likely your invoice was lost.

Make sure your contact information is on your invoice:
Include your company name, email address and phone number on your invoice, you would be surprised how often this information is not included.  Also, have clear instructions on who the check should be made out to and the remittance address.

Submit a new invoice for each progress payment:
Don’t assume someone at our company is keeping track of your progress payments. Maybe the employee you contracted with is, but most likely they are not and I can guarantee accounting is not. 

Offer a discount:
Unless we are cash-strapped we always take advantage of cash discounts for early payment. Either 1 or 2% off the invoice price is the most frequent discount offered, but I have seen 3%. (My company does not offer pre-payment discounts to our customers. We don’t want them to get used to paying less and then expect it).

Other tips

Call to ask about payment three or four days after payment was due:
The longer your bill goes unpaid the harder it will be to collect. Good luck getting an invoice paid if the person you contracted with is no longer at the company and the company has no record of the order. And speaking of due dates make sure you’ve indicated your terms on the invoice.

Be nice:
The person in accounting who takes your collection call does not need to be berated or to hear what a low-life scum they are. It is almost never their fault your invoice hasn’t been paid. If you are nice to them or befriend them they may look out for you and your invoices in the future.

Ask for an exception:
In a major cash crunch like the one Stefanie is experiencing above, ask if your invoice could be paid earlier than the terms agreed upon. Only do this if your project is on schedule and the company is happy with your work. Offer to pick up the check or have it mailed to you overnight at your cost. Offer additional discounts above what is stated on the invoice. We have been offered as much as 5%. Give a deadline – by the end of the week or by the end of the month; you don’t want them to take their good old time and still take the 5%. This is also where befriending the accounts payable person comes in handy. More than once my A/P person has asked if she could pay a bill early at a vendor’s request. She will tell me how nice they were, that they are just a small business, that they are in a bind etc. If we have the money, I always say yes.

You could also ask to have the money wired into your bank account.  You would then have your money the same day.  At my company this is a hassle because it involves additional steps and layer of approval.  I usually say no to these requests.

Don’t forget about credit card processing fees:
If you accept credit card payments you most likely are charged a fee by your credit card processing company. My company pays 2.5% on customer credit card receipts. We pass this fee on to our customers for sales larger than $25,000. On a personal level, I have worked with more than one contractor who charges extra if I want to pay with a credit card.

Have your customer sign a contract:
If you are large enough, have your contract verbiage reviewed and/or written by your legal consul.

Did I miss anything? What do you do to insure your invoices are paid on time?

*Part of Financially Savvy Saturdays on brokeGIRLrich,