11 Sep The Art of Getting Paid, Part 2: How to Reduce Friction in Collections
In last month’s newsletter, we discussed the art of getting paid as a small business owner. Yes, it’s an art form! Our first article, “Avoiding Common Pitfalls in Accounts Receivables” discussed the importance of accuracy in invoicing and the Time Value of Money. We are going to expand on that this month. Let’s take a deep dive into how you can reduce friction in collections.
Why isn’t my client paying me?
You may be asking yourself, “Why are my clients not paying me in a timely manner?” As we discussed last month, the majority of the time, the problem is not that your clients are difficult or unwilling.
The majority of payment delays can be traced back to one of the following reasons:
- The Bill Did Not Reach the Right Person
- The Bill Was Confusing
- Delayed Invoicing
- Issues with the Invoice
Sometimes bureaucracy within their organization is the culprit, slowing down the approval and payment process. Sometimes, however, the client is experiencing financial difficulties. Cash flow issues make it difficult for them to pay your invoice on time. So how do you get them to “show you the money”?
To mitigate the risk of being left with hard-to-collect Accounts Receivable, consider requiring upfront payments or deposits, especially for larger projects. For ongoing projects, break the payment into milestones to ensure you’re paid as work progresses. This not only secures your cash flow but also demonstrates the client’s commitment. But one of the most simple ways to ensure payment is to make it as frictionless as possible. Let’s dive into best practices for collecting on your Accounts Receivable.
Make it super easy for your clients to pay you.
In his book Friction: The Untapped Force That Can Be Your Most Powerful Advantage, Roger Dooley discusses how reducing friction—unnecessary or excessive effort required to complete tasks—can lead to significant business advantages.
Your goal is to make it as easy to do business with you as possible. Make sure the tech processes are smooth and that you have no difficult forms to complete. By providing clients with various payment options – such as credit cards, ACH transfers, PayPal, digital wallets, etc. – you are making it more convenient for them to pay. Integrating online payment portals into your invoices makes it easier for clients to pay quickly.
For example, at Reconciled Solutions, we never want the reason for non-payment to be that we do not accept the client’s desired form of payment. While we’re not fans of having to share our revenue with our Merchant Services vendor (credit card payment processors often withhold 2-7% in fees) we offer that option in order to reduce friction in collections.
If you are in a state where a surcharge for paying by credit card is allowed (Colorado, Connecticut, Kansas, Maine and Massachusetts are the only exceptions), allow credit card payments and set up your payment system to add a surcharge to pay for that benefit.
A case study in how to reduce friction in collections
I recently met with a new client who helped us uncover some previously unnoticed friction in our onboarding process. When we welcome a new client to Reconciled Solutions, we always ask them to complete an onboarding form in Dubsado. This new client alerted us to the fact that this form was causing friction in the process!
He told us that the questionnaire was long and took a good amount of time. And to make matters worse, he took a break from completing it and came back to find that the form did not save his progress. He had to start all over again.
The fix was relatively easy: shorten the form where possible and change the setting so that the user can save their progress and return at a later time. But if we didn’t ask for feedback or test the process ourselves, we wouldn’t have been able to uncover and address this friction in the crucial process of onboarding new clients.
If you have ongoing issues with getting paid on time, chances are you could make a change that would reduce friction in collections. Go through the process yourself or ask a trusted client about their experience to uncover the source of the problem.
Automate your invoicing to reduce friction in collections
Use invoicing software such as QuickBooks Online to automate the invoice generation and tracking. (We will go into more detail with this in next month’s article.) This helps with:
- Timeliness: if a client has to wait too long to receive a bill, they may not remember what work you actually did for them and it will result in making them slow to pay you. Follow a regular and consistent schedule for releasing your billing!
- Reducing manual efforts: For regular clients, set up recurring invoices to save you time each month.
- Accuracy and clarity: you want your invoices to be free of errors and detailed enough so the client knows exactly what they are being charged for and when they are expected to pay, but not TOO much detail which may result in the client nitpicking items. You will have already laid out in the contract what is INCLUDED and EXCLUDED from the scope of work
Consider late fees
Consider implementing late fees for overdue payments, as mentioned in your contract. By charging interest or late fees for overdue payments, you are compensated for the loss of the Time Value of Money and you are encouraging timely payments. The client may need an incentive to pay promptly. The late fee should at least cover the loss of potential earnings on the delayed payment. Be consistent in applying late fees to encourage timely payments
Use payment terms that incentivize early payments
As you know, the sooner you receive payment, the more valuable the money is, allowing for better cash flow and investment opportunities.
Instead of “Net 30,” consider offering “Net 15” or even shorter terms, especially for new clients. This reduces the time your money is tied up. Encourage quick payment by offering discounts for early payments, such as a 2% discount if paid within 10 days. This not only encourages quicker payment but also allows you to reinvest or use the funds sooner. Even a small discount can be worth it if the money can be reinvested at a higher rate of return.
Regularly review aging receivable
It’s important to have an Aging Report that you review regularly to identify overdue invoices and prioritize follow-up. Don’t wait too long to follow up on overdue invoices! Remember the Time Value of Money we discussed last month how quickly the account collectability over time decreases. You’ll want to categorize overdue invoices by age (e.g., 30, 60, 90 days overdue) to determine the appropriate collection action.
Implement a structured follow-up Process
Develop a step-by-step follow-up process for collection of outstanding invoices that includes initial reminders, phone calls, and escalation steps.
- Set up automatic reminders for upcoming and overdue payments through your invoicing software. Send polite reminders as soon as a payment is overdue. It’s very likely that your client isn’t trying to avoid you, but simply forgot to pay you. Keep in mind, however, that a personal follow up call or email can be more effective than automated reminders.
- Schedule collection efforts into a regular cadence on your calendar. Set a timeline for each step (e.g., reminder after 7 days overdue, phone call after 14 days) to ensure consistent and timely follow-up. Document which client you have followed up with on late payment, date of outreach, communication method used to reach them, and any replies to your request for payment. Escalate the issue if payment is not received after multiple attempts, including sending a formal demand letter.
If you don’t follow up on overdue invoices, clients might not feel pressured to pay on time. By reaching out to the client, you will better understand the issue and work towards a resolution. If a client is facing financial difficulties, consider negotiating a payment plan that works for both parties.
Maintain good client relationships
When clients are slow to pay, it can be difficult to remain professional. Be polite but firm in your communications regarding overdue payments. Maintain professionalism while clearly stating the need for timely payment. The most important thing to remember as a small business owner is that you are continuously building and maintaining strong client relationships.
Building trust with clients can lead to timely payments, as clients value your partnership. For severely overdue payments, you might need to take legal action or use a collection agency, but this should be a last resort.
