Businesses are never only focused on their customers, trying to grow sales, but they also have to pay attention to their incoming costs. This means, they regularly invoice customers but suppliers as well and if they don’t have a smooth, consistent system set up for it, the lack of organization will bring its own challenges.
For instance, one in every six sole trader and small business invoices are regularly paid late. On the other hand, if businesses don’t pay their own invoices on time, they might have to face late payment fees, too which costs small and mid-sized businesses as much as $3 trillion globally. All in all, invoice payments can be considered the backbone of managing a business — this is why we put together this beginner guide for merchants.
What is an invoice payment?
Invoice payment is sent from the seller to the buyer, based on an issued invoice that provides information on the goods and services that are being exchanged and the payment requirements.
Invoice payment is concerned with either the invoices that businesses issue for their customers and those that they receive from their suppliers who expect to be paid in return for their products and services. For example, a candle webshop invoices its customers for every candle sold but also receives monthly invoices from the e-commerce software they use to be able to sell their products online.
Depending on the sector and the laid out business processes, an invoice can be issued at the time of purchase for example, or after it, in which case it acts more as a receipt. An invoice can also be paid much later after the services were provided if the deadline for payment signals that and the payment is not expected immediately.
For example, when doing online shopping, the shop’s invoice is usually generated at the same time as the purchase goes through or just a couple of minutes later, often received in an email, while contractors will often invoice their buyer after their work is done — in this case, the payment deadline can still vary.
What to include on an invoice?
Different information is usually displayed on invoices. Some of them are absolutely essential, while others are optional.
Must-have information on an invoice:
- Date of the invoice
- Invoice number
- Supplier/ vendor contact information
- Customer contact information
- Description and quantity of goods and services provided
- Subtotal, Taxes and Total amount to be paid
- Payment terms/ due date
- Payment options
Optional information on an invoice:
- Special fees, such as displaying early discounts or late payment fees (depends on the choice of the issuer of the invoice)
- Purchase Order (PO) number (depends on if the customer’s business generates it to authorize payment)
- Logo and other branded elements
Best practices for invoice payment
As mentioned, there are two general scenarios when invoice payment comes up. One, when the business sends out invoices to its customers and the other when it receives invoices from its suppliers. We collected some tips for both cases, so merchants can improve their invoice processing system.
Sending out invoices: Tips to get paid faster
- Use an invoice template for convenience and even branding purposes (e.g., including your logo and contact information)
- Set up an invoice payment system and agree on the terms and conditions with your customers before any purchase to avoid subsequent problems (e.g., late payment)
- Send the invoice to the right person which will save you time and won’t let it “get lost” on the other side
- Offer multiple ways to pay and alternatively, early payment discounts, which shows flexibility to customers and can urge them to pay sooner
- Include a cheat sheet for the payment terms used in the invoices if necessary, which will help your customers see clearly and may urge them to pay earlier (the need for this practice will largely depend on your industry and the specific customer as well)
- Signal your terms for receiving late payment ahead of time to help avoid them (e.g., having the customer pay interest, you withholding further service)
Receiving invoices: Tips to maintain financial and mental balance
- Check the due date, the list of product and services provided and the cost: perhaps these details are the most important information on an invoice and understanding them will help you manage transactions as well
- Choose and decide on the payment method: the supplier may define the method but in some cases, you may be able to choose so make sure to go with the most convenient or cost-effective one, whether it’s cash, card, mobile payment or an eCheck
- Set a reminder for paying the invoice: this will allow you to be on time, avoiding late payment fees or other penalties or even better, the supplier may provide early payment discounts you can take advantage of
- Organize your invoice management system: from scheduling invoices to creating accounting reports, your invoice management must be systematic and easy to review, which will save you time and let you tend to other parts of the business where your time is better spent (e.g., bringing in new business instead of chasing invoice information in an unclear system)
Invoice payment terms example
Here’s an example of payment terms that merchants can see on an invoice.
- Net 60
- Payment is due 60 days after the invoice date.
- 1% 10 Net 30 or 1/10 Net 30
- Payment is due in 30 days but the customer will receive a 1% early payment discount if they pay in ten days.
- Payment is due by the end of the calendar month.
- 14 MFI
- Payment is due by the 14th of the month following the invoice date.
- Due on receipt or Upon receipt
- Payment is due as soon as the customer receives the invoice.
Some other common terms include:
- PIA: payment in advance
- COD: cash on delivery
- CND: cash next delivery
- CBS: cash before shipment
- CWO: cash with order
There can be many variations of some of the above terms, e.g, the due date can be net 30 or net 7, the early payment discount can vary depending on the merchant’s decision as well but usually stays a lower number, and there are several other options to go with if you’d like to specify the payment due date for your invoice.
The main goal is to include every term and condition after careful research into what’s best for your business, keeping in mind your finances as well as your partner relationships.
BONUS: How to ask for payment of an invoice
In case you have an overdue invoice, there are several measures you can take:
✓ Collect information, know the details of the case before contacting the other party.
✓ Check if the customer/ client has received the invoice.
✓ Contact them in a written form, give them all the specific details necessary about the invoice (e.g., the date of the due date that has passed, the eventuality of late payment fees) and express politely that payment is to be made.
✓ The following or a few days after contacting the customer/ client in a written form, it’s best to talk to them on the phone, to make sure the message got through earlier, plus, a human touch like simply talking to the other party may help your case. Keep being polite but get a confirmed date of payment you can later refer to if necessary.
✓ If the payment still won’t come through, you have several options: keep waiting, put late payment penalties into effect (e.g., cutting off work for the client/ customer), review your legal options.
How much time you wait between steps is up to you but it’s common practice to send a first reminder a week after the payment was due. After that, businesses may do one or even two follow-up rounds as many factors can come into play, from the general policy they represent, if they want to set an example or the nature of the relationship can be influential, as well.
Invoice payment: Make them work for you
As a golden rule, make sure to stay on top of your invoice payments to ensure a healthy cash flow and good business relationships with your suppliers and customers alike. Follow our best practices and master invoice payments so you can rest assured that money works for your business, not against it.