Business owners want four questions answered when it comes to their business:
How much do people owe me?
Am I profitable?
In this post we’ll be addressing the second question: How much do people owe me? Future cash inflow is of critical importance to the success of a small business. It’s the lifeblood of your business and having cash flow is going to keep you in business.
Apple Dumpling business is booming
Anna owns a truck that she sells apple dumplings from and a kitchen where she caters out of. In the previous post in this series, we answered Question #1: “How much cash do I have?” for Anna. She has adjusted her accounting system using Xero to be able to determine the correct number to answer Question #1.
Anna recently finished a catering job that was worth $3,500. She looks at the Accounts Receivable number in her books. (Accounts Receivable is accountant speak for the amount of money people owe you.) Her AR shows that her catering customers owe her $15,000, but her gut feeling is that it should be closer to $19,000.
Anna wonders why $19,000 is not reflected: how could the number be more accurate so that she can run her business better with a clear knowledge of her future cash inflow?
The three rules of invoicing
Anna got that familiar sinking feeling when she realized she needed to pay better attention to her future cash inflow, but had no idea where to start to figure out a process to do so. Accounting software will tell you what your AR is, and that’s a great first step in the process. An accurate AR, however, is just the product of a good process. The purpose of the process is to get paid as efficiently and quickly as possible.
We suggest that Anna implements these three rules into her process to recover her owed money as soon as possible:
Keep accurate records
Invoice Promptly
Offer easy payment methods
Rule #1: Keep accurate records
Before you can send out an invoice, you need to make sure it accurately reflects the complete job. Is everything on the invoice that needs to be there? Is it complete? Your invoices will be accurate if you keep accurate records.
Anna, from our apple dumpling story, realizes she needs to send an invoice for the $3,500 catering job, but remembers that there was an add-on service with an extra fee of $250 that the customer requested. If you bill for everything you should be billing for, then those costs, time, and materials should be captured accurately in the right place.
If everything is accurate (if you haven’t noticed already, accuracy is important) on the invoice, then you’re going to get paid sooner. And the sooner you get paid, the sooner you get paid!
Rule #2: Invoice promptly
In the immortal words of Nike, just do it. If you need to invoice, the best way is to just do it. Sending out the invoice as early as possible starts the clock. And you’ll get paid, yep, sooner.
Delivery errors can be fixed quicker. For example, if you send an invoice to the wrong person initially and don’t receive payment then the error is caught sooner (and again, you get paid sooner).
Surveys indicate that almost half of companies invoice within hours of completing a job.
Rule #3: Offer easy payment methods
You’re going to be more likely to get paid, and sooner, if you make it easy for your clients to pay you.
Anna sends out an invoice for the $3,750 catering job by mail. She receives a check in the mail from the customer 30 days later and she wonders if there’s a better way to do things than chasing so much paper. As a business owner Anna wishes she didn’t have to touch something so many times, especially after the service was finished.
There are easier ways to get paid, Anna! Offering customers the option to pay by credit card, online through an electronic invoice is going to cause less friction. After the electronic invoice is sent, there is no further touch involved because the money goes straight to your bank account and the invoice is marked off as paid inside the accounting system. Look mom, no hands!
The recipe for success
Anna follows a recipe to produce quality apple dumplings. She needs to be able to produce a quality AR, and a good process is the recipe for her to do that. Good accounting software is like having raw ingredients and making the recipe from scratch every time. With great accounting software, you create the process from scratch the first time and then the software continues to replicate the process. Xero is our accounting software of choice. You can build your process around Xero, and it’s so easy to do.
Good accounting software will give you an AR number. Great accounting software will elevate the process and give you an accurate AR number. If you’re ready to reliably predict your future cash inflows, nail down your invoicing process. Start today with us as your advisor.