Why Unpaid Invoices are Hurting Your Business

For any business, cash flow is king. You need consistent cash coming in the door to pay for ongoing expenses like payroll, rent, inventory and more.

When a customer fails to pay an invoice, it throws a wrench in the cash flow machine and can leave your business strapped for working capital.

This issue is quite common both in Australia and in other major countries, like the USA. According to Fundbox, 82% of small businesses in the US report problems with customers paying late.

For statistics closer to home, a survey conducted by Xero found that 48% of the invoices issued by small businesses in Australia were paid late in 2021, and on average invoices are paid 6.4 days late which costs businesses up to $1.1 billion per year.

The impact of unpaid invoices adds up quickly and can leave lasting financial damage if the issue isn’t addressed promptly and effectively.

In this article, we’re going to discuss the impact of unpaid invoices on businesses and the things you can do to help avoid this from occurring in your business.

How Unpaid Invoices Hurt Your Business

There are a few key ways that unpaid invoices can negatively impact a business:

  • Reduced Cash Flow This is the most obvious and immediate impact. Your business is providing goods or services and fronting all associated costs, without being paid in a timely manner for that work, sometimes for weeks or months. This directly takes money out of your available cash flow for the period.
  • Increased Bad Debt If an invoice remains unpaid for too long, it may need to be written off as bad debt, accounted for as a loss. This directly reduces net income.
  • Higher Borrowing Needs To cover ongoing expenses without incoming cash from unpaid invoices, businesses often need to borrow more, through loans or credit lines. This increases interest costs and overall debt burden.
  • Inability to Pay Vendors Your business likely has its own vendors and suppliers to pay. Untimely customer payments can make it harder to pay your own bills on time.
  • Decreased Future Orders Customers that don’t pay their invoices likely won’t be placing many future orders. This impacts future revenue streams.
  • Wasted Time & Resources Significant staff time can be wasted following up on late invoices and trying to collect. This is time that could have been spent growing the business in more productive ways.

In extreme cases, severe unpaid invoice problems can even jeopardise the entire viability of a business if there is no working capital to cover basic expenses. But for most businesses, it’s more of a slow drain on resources and income. Either way, it’s an issue worth addressing head-on.

Establishing Strong Credit Policies

The best way to avoid unpaid invoice issues is to establish strong credit policies and payment processes upfront with customers. This means setting clear expectations before problems arise. Key elements of strong credit policies include:

  • Defined Payment Terms The invoice due date and any late fee penalties should be clearly stated on every invoice and within your terms and conditions. 30 days is typical for net payment terms.
  • Customer Credit Checks For larger, long-term customers, conduct credit checks upfront to uncover and evaluate financial risks. Build the cost of extended credit terms into your pricing if needed.
  • Late Fee Enforcement Follow through and actually charge late fee penalties when customers pay past due. This helps offset your costs of extended credit.
  • Required Deposits Requiring upfront deposits from customers helps ensure at least partial upfront payment and commitment. Typical deposits are 10-30% of total expected costs.
  • Stopping Work for Non-Payment Your contracts should allow you to stop ongoing work if invoices go unpaid for too long. This gives you leverage for collecting.

The idea is to identify potential issues on the front-end, and then follow through on enforcing policies on the back-end if needed. This disciplines customers to your standard processes.

Streamlining Your Invoicing Process

On top of strong policies, your invoicing and collections processes themselves also need to be efficient and consistent to minimise unpaid invoices. Key steps include:

  1. Send Invoices Immediately Invoice as soon as work is completed, don’t let invoices pile up to be sent out together later. If you send out invoices late, it delays starting the clock on your payment terms.
  2. Offer Multiple Payment Options Give customers flexible options like accepting credit cards, ACH or wire transfers. This makes it easier to pay you.
  3. Use Invoice Automation Automated creation and sending of invoices improves accuracy and streamlines your processes.
  4. Make Invoices Clear Include all pertinent information and make your invoices easy for customers to understand. This avoids disputes down the line.
  5. Use Collections Software Automate collections follow up activities for efficiencies. Software can send automated reminders and follow ups at the right times.
  6. Provide Incentives Consider offering small discounts for customers that pay invoices early or via auto-debit. This encourages timely payment.

Again, it’s about consistency, clarity and automation as much as possible. The easier you make it for customers to know what, when and how to pay, the fewer unpaid invoices you’ll see.

Following Up on Past Due Invoices

Even with great policies and processes, you’ll inevitably have some past due invoices. When this happens, follow up quickly, clearly and persistently.

  • Personal Outreach Start with a personal phone call or email to the main billing contact to discuss the past due invoice. Keep the tone friendly but urgent.
  • Document the Terms Restate clearly the original payment terms and when the invoice officially became past due. Don’t let them claim ignorance.
  • Remain Persistent If initial contacts don’t work, follow up again and escalate the issue internally with the customer. Repeat consistently but professionally.
  • Offer Payment Plans Propose or accept reasonable alternative payment plans if needed, as partial payment is better than no payment.
  • Consider Incentives Offer small incentives like waiving late fees if they pay in full immediately. Don’t undercut your own policies too much though.
  • Use Collections Letters Formal printed letters become necessary for invoices 60-90 days past due or more. Take a firm tone pointing out late fees and overdue status.
  • Involve Legal Counsel If letters and calls don’t work after 9 months or so, engage a collections agency or legal counsel to take over collecting.
  • Write Off When Necessary At a certain point you may have to write off a past due invoice as bad debt. Do this quickly and move on when needed.

The goal is to collect without fully alienating the customer if possible. You want both payment and future business if appropriate.

When To Say When

Not all customers can or will pay their past due invoices, even after extensive follow up. At a certain point you have to make a business decision around how much additional time and resources to expend trying to collect from a difficult account.

Factors like how large the invoice is, the potential for future business, and your internal bandwidth will impact this decision. Cutting your losses sooner rather than later is often the right business move. You don’t want to waste 90 days trying to collect a $500 invoice from a customer that has moved on. Know when to say when and focus your efforts efficiently.

Get in touch with a reputable debt collection agency

If an invoice remains unpaid after extensive in-house efforts, hiring a professional debt collection agency like JMA Credit Control is the next recourse.

Collection agencies have the expertise and tools to pursue difficult debts. Just make sure to vet agencies thoroughly – many employ aggressive tactics that could hurt your brand reputation. Look for an agency that is transparent in its approach and fees and avoids overly aggressive collection practices. They should follow all state and federal regulations in Australia. Reputable agencies are often members of the Australian Collectors & Debt Buyers Association (ACDBA).

Ask for referrals and review sample reports to understand their capabilities. A good agency acts as an extension of your brand.

Importantly, they should comply with Australian consumer protection laws like the Australian Consumer Law and Fair Trading Act. With the right local partner, a collection agency can secure payments from even the most stubborn past due accounts while maintaining your brand reputation.

Getting in touch with a debt collection agency will not only save you money in the long run, but time as well.

Preventing Future Issues

To wrap up, preventing unpaid invoices requires action across your business on multiple fronts:

Start with clear policies and customer credit review – This is your first line of defence.
Maintain organised processes – Send invoices quickly, automate where possible, and keep records organised.

Follow up consistently – Don’t let invoices languish too long before initial contact and follow-ups.
Work with customers – Offer reasonable payment plans and incentives if needed.
Cut losses when required – Know when to walk away and reallocate resources elsewhere.
Get the right people to help you – contact JMA Credit Control so you won’t waste time chasing clients.

Even with robust efforts, you will likely still run into some payment issues. But disciplined processes can minimise headaches down the line and help you find a resolution sooner. Unpaid invoices don’t have to be a major drag on your business’ financial health and growth. With some focus and effort, you can tackle this common issue effectively.

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