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Get financials right from the start with a plan for collections

A checklist to help businesses set up effective invoicing and collections

A solid collections process—making sure you're paid promptly for your products or services—is an essential part of smooth cash flow, and a healthy company.

"When you need to make payroll, or if you have a big project coming up, having your arms around timing of payments is critical," says John Bailey, founder of Boston Startup CFO, which provides financial consulting to startups.

Use this checklist to help establish fundamentals that will serve your business well for years to come.

1. Involve your sales team: Get salespeople to gather important billing and collections data at the start of a relationship. Ask them to:

  • Gather new customer information. Give them a template that includes names, phone numbers and emails of the purchaser and accounts payable contact; the physical address; and any invoicing requirements.
  • Participate in collections efforts as needed.
  • Check a customer's payment history before extending more credit.

2. Line up resources for credit checks: Equip your team to run credit checks on new customers for particularly large deals. The major credit bureaus offer online services. In addition, provide no-cost research tools that sales can use, such as:

  • Plug-ins available for some customer relationship management systems
  • Local Better Business Bureau sites
  • Guidelines for a basic web search that may turn up relevant news about the customer or other information

3. Set terms: Determine how soon you will expect customers to pay. For example, you may start with terms that require payment within 21 or 30 days of the invoice date. You might offer a discount for paying early. Charging late fees of 1.5 percent to 2 percent monthly also provides incentive to pay.

4. Set payment type: Decide what kinds of payments you will accept. Accepting credit cards on your website via a merchant service such as Chase Checkout may encourage customers, especially smaller ones, to pay invoices more quickly.

5. Define your invoice format: Create an invoice template. It should include bill-to and ship-to names, addresses and contact information; purchase order number; payment due date and invoice date; and terms, including any early payment discounts or late payment fees. Also provide information on how to remit payment, including your bank account name, number and routing information.

6. Tap tools that speed payments: Set up electronic invoicing. You may need your IT person to set up a template for your accounting software, but "in the long run, it's totally worth the time and investment," says Bailey. If bigger accounts require you to invoice them through their own portals, your sales team should get you logins. Look for bank services that move payments into your account faster. For example, Chase Express Funding allows small-business owners to receive funds from customers' card purchases the next business day, rather than the more typical several-day processing. Customers who have business checking and merchant services accounts with Chase can take advantage of this benefit.

7. Put yourself on a schedule: Pick a day of the week—say, every Friday—when you always do invoicing, and stick to it. Likewise, pick a day to review receivables to identify accounts that are past due and require further action. Speedy action on delayed payments will dramatically impact your likelihood of collecting.

8. Set communications protocols: "Put a defined policy in place for reaching out to customers," says Bailey. Establish a polite, respectful relationship with the customer's accounts payable department. "Never take a hard line with someone in accounts payable," he says. Start all interactions in the spirit of seeking to clarify and remedy any miscommunication. Create a follow-up schedule: At 30 days, send a friendly reminder; at 45 days, send another and mention applicable late fees; at 60 days, send a letter—and ask sales to check in with their contacts as well. If you've had no response at 90 days, you might write off the debt and refer it to a bonded collection agency.

9. Measure results and tweak your process: At the end of each month, calculate your "Days Sales Outstanding" (DSO). Divide your current accounts receivable by the total sales made on credit during the month, and multiply the result by the number of days in the month. The average benchmark is around 45 days, according to Bailey. If you implement changes, such as shortening your payment terms, or sending invoices out earlier, calculating your DSO every month will reveal whether those moves had an impact.

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