Invoicing seems like a pretty simple process on the surface. You send a customer or client an invoice for goods or services, and they send you the money. But if you’ve done a lot of invoicing, you probably realize that it’s not always that straightforward. You have decisions to make about how and when you issue those invoices. Should your invoice be due on receipt, net 15 days, or net 30 days? In advance or in arrears? Should you charge late fees? There are advantages and disadvantages to each approach.
Due on Receipt
On the one hand, “due on receipt” bills the closest to your cash flow, so it reduces the amount of time you are out of pocket. On the other hand, this approach is also typical—and expected—for many monthly invoices. It works particularly well if you want to deliver invoices based on time (once a month) or milestones (after phase 2 is complete).
On the other hand, people don’t like to feel that they are paying for things late. And “due on receipt” suggests that the payment is already late (after all, nobody can pay instantaneously), particularly if the invoice is sent through the mail. It can also be difficult for clients to pay on receipt if the amount is significant or unanticipated.
Net 15 Days
Asking for your invoice to be paid within 15 days is a bit of a middle ground between “due on receipt” and “net 30 days.” It allows your client a little breathing room before the bill is due but doesn’t have as big an impact on your cash flow.
However, because “due on receipt” and “net 30” are much more standard, clients probably aren’t expecting to get a “net 15” invoice. In addition, it might not mesh well with their bill-paying cycle, so that they might ignore or resent your payment terms.
Net 30 Days
There are a couple of advantages to “net 30 days.” First, this is probably a more realistic approach to payment for larger organizations since it is closer to the vagaries of their cash flow. Second, “Net 30” is typically used by suppliers so that retail stores have the opportunity to sell the items supplied and use that money to pay the invoice.
However, if you are invoicing regularly, “net 30” can mean that payments get bunched up all at once, and that can be detrimental to your cash flow.
In Advance vs. In Arrears
Should you invoice before you perform a service or provide a product? Or should you do so afterward? You might be tempted by “in advance” since it gets money into your bank account faster. But some clients’ cash flow systems don’t allow them to do “in advance.” Advance invoices also work best when you have a tight scope of services or products—if you provide the same services or the same number and kind of products every month, for example.
If you are billing by the hour for your services, you’ll almost certainly need to do it “in arrears” because you won’t know the number of hours until the end of the billing period. Lawyers and other professionals use retainers for this reason. Thus, they can be sure that they will get paid at least for the initial time they put in.
Should You Charge Late Fees?
You might like the idea of charging late fees to clients who fail to pay on time, but it has some downsides. First, you need to administer late fees: keep track of them and bill for them. In this way, late fees become another task that you need to perform. Second, charging late payments can also hurt your relationship with the client.
If invoicing is something that always seems to take up your time or gets in the way of other important matters, delegate those tasks to a team of professionals equipped to help! Contact Office Accomplice and learn how we can make your invoicing easier.