Making the transition from traditional employment to being self-employed comes with several challenges including accounting and bookkeeping roles. Instead of having taxes deducted from your paycheck as an employee, you must calculate your tax payments every quarter as a self-employed individual. In addition to this, self-employed people must keep accurate and detailed books if they want to manage their businesses successfully and avoid problems such as fraud as they grow.
It is best to keep track of important financial forms and documents such as form w-9, Schedule SE (Form 1040), Schedule C (Form 1040), Schedule C (Form 1040), 1099 Forms, receipts, financial statements, and bills. Yes! Billing statements are also necessary. The law requires that if you sell a customer an item or a service, you have to send them a bill if the both of you are VAT/Tax registered.
What You Need to Know About Invoicing
The way you send bills to your customers can make a huge difference on how the payment will be made. An efficient billing process is important in maintaining a healthy cash flow. It can significantly reduce the time between when a project is completed, or goods are sold and when you get paid. It also reduces the time spent when sending bills and making payments.
The billing process has several phases that can cause costly delays such as incorrectly matched bills, sending bills to the wrong department/person and even failing to state the mode of payment. Therefore, integrating the best practices in your billing process is vital to your small business.
Making Your Billing Process Efficient
Bills are not similar to receipts which are an acknowledgment of payment. Sending bills affect the time you receive payment and the terms on which the payment is made. Here are some essential elements that can ease your invoicing process:
1) Know your customers
It is best to know your clients to increase the chances of being paid on time. Perform a background check on your customers’ payment and credit histories to avoid those with payment problems. Conducting a credit check with a credit reporting agency can be helpful before accepting a large order.
Establish how a customer will be billed, and the due date of payment when dealing with customers whose credit reports raise concerns.
2) Break down large projects into smaller bills
It is better to bill in sections if you are working on a project that consumes a substantial amount of your business’ time and/or expenditure in raw materials. For instance, you could do one-third upfront, the other bit halfway and the last part on completion.
You can agree with your customer on deposit and balance payments that suit both of you. This way you will not lose everything the customer owes you when they run into financial problems part way through the project.
3) Define your payment terms
Establish the payment terms on all bills. This maintains good customer relations and also increases the possibility of getting paid on time. Put a time frame and the actual due date for payment on the bill.
You can also explain other payment terms such as penalties for late payment and the amount it will cost if the payment is not made on time. However, this is not always an effective approach. A more positive way is to offer a small discount for early payments.
4) Provide convenient payment options
Give your customers several payment options such as credit card payment and direct payment into a bank account. You may also consider online payment options such as PayPal, Amazon Payment, and Intuit. Some of these can be easily integrated with your finance software and online billing system.
More payment options increase the possibility of being paid on time.
5) Create professional-looking billing statement
Invoices are written demands for payment. Therefore, your small business bills should include the following:
• Your business name, address and contact details
• The company name and address of the client you are billing
• A unique identification number
• A clear list of the items or services you are charging
• The quantities and unit prices of the goods/services
• The supply date
• Discount and VAT where applicable
• The total amount you are looking to collect
Good quality invoice software has templates that can generate bills with all the necessary details. A clear and detailed statement is easy to understand. The easier it is for your customer to understand the statement, the more likely you are to receive quick payments.
6) Keep a document trail
Record all communication and telephone conversations on bills and file them for future references. Document everything passed between you and the customer like project change details and price changes. When billing through email, include the statement as an attachment instead of placing it in the body of the message. This makes the bills easy to read, and the client is less likely to overlook any part of the bill.
Dealing with Late Payments
As a small business proprietor, handling slow-paying customers can cause a serious cash flow problem if many clients fail to pay on time.
Use this tips to encourage faster payments from sluggish customers.
a) Send the bills immediately
The faster you send the bills to customers, the earlier they will pay. Billing at a later date damages cash flow and reduces revenue from shipped products or work that has been completed. Send the bills immediately, not at the end of the week or month.
This way the payment terms start at an early date, and this will ensure that bills are not overlooked. Additionally, if the billing date drifts too far from the date the project that was done, the customer may have some challenging accounts reconciliation to do. This can happen if the two events fall in different tax years.
For this reason, send bills promptly or as soon as a project is completed. Some billing software will automatically schedule bills and even create and email them to your customers.
b) Reduce the paper
Another way of getting quick payments is to reduce paperwork through digitization. Eliminate paper bills as much as you can and use electronic bills. Today, many systems support electronic bills without costly EDI (Electronic Data Interchange) infrastructure. While sending PDF electronic bills is as burdensome as paper bills because it still needs data entry and archiving, it does reduce pushing paper and scanning bills.
What is your procure-to-pay time? The average cycle time is 23 days. You can significantly reduce this time if you do not have to deal with paper bills or bills that come as email attachments. Some self-employed individuals have pared down their processing time to as low as five days. Unfortunately, one-quarter of businesses send their bills electronically.
c) Keep track of late payments
Great billing software can provide reports that will categorize what you are owed in age of the bill, showing you customers who owe you money and the amount owed. Some software allows you to send emails to the slowest payers so you can remind them of the payment agreement while others even show you when a customer opened the invoice online.
Follow up on late payments by making collection calls. However, reach out politely to clear up misunderstandings. It is best to use a matter-of-fact manner when making such calls. Before the conversation ends, communicate the due amount and date of receipt.