When clients don’t pay their invoices.
It's Friday! I hesitated before sending you this heavy-educational-type content today… my worry: it's Friday. Isn't everyone already dreaming about patio drinks and not really interested in accounting-y stuff?? I mean, maybe.
But I have such important info to share with you today so can we multitask? Grab that Red Sangria and let's dive in!
Let's talk about clients who don’t pay their invoices
and, more specifically, the hidden costs of your accounts receivable balance. 🤔🤔
If you have a bookkeeper, a CPA and QBO, you may find yourself saying - Why oh why, Tanya, must I learn about accounts receivable?
Well, a few reasons.
The easiest way for me to explain it is to relate this to my car. I have an EV which has self-driving capabilities (although.. not *technically* in SK..). Basically, that means that my car can adjust speed and stay between the mayo and the mustard when I’m driving on the highway.
But every so often, I have to adjust the steering wheel or hit the brakes because, while I love that my vehicle can drive itself, it’s not even close to perfect.
❌ It doesn’t know how to slow down in Delisle.
❌ It sometimes thinks black skid marks require a full vehicle stop...and
❌ It decreases speed when I'm within 2km of another vehicle lol. 🤦🏼♀️🤦🏼♀️
Etc., etc., etc…
Not ideal.. so I frequently need to intervene and make sure the vehicle is doing what it's supposed to.
Anywho, my required alertness while driving this vehicle is kinda like you and your accounts receivable balance.
Yes, you have people and programs that are entering transactions into your AR account, but as a biz owner, I still need you to know what’s happening in there, friend. Why?
If you’ve extended credit to your customers (aka you’re doing the work AND THEN asking for payment = accounts receivable), you have the following stuff going on and you might not even know it:
Increased team costs - you need someone to track how much each customer owes and follow up to ensure the receivable is paid. That “someone” might be you and the cost may be your time.
Bad debt costs - inevitably, you might have some customers who will dispute what they owe you or just ghost you completely. These ‘bad debts’ (i.e. AR that’s no longer collectible) will significantly increase the cost of extending credit to your customers.
Delayed receipt of cash - Let’s say you have to wait 60 days for *that customer* to pay her invoice. Because you were relying on that cash for normal operating expenses, you now have to rely on your line of credit instead. That LOC costs you interest at a rate of about 8% (if you’re lucky). The interest on this LOC is a real cost of extending credit to your customers.
Unfortunately, I'm betting no one has eyes on these costs, but they are real and can significantly impact your growing biz.
And if your average AR balance seems to be inching higher and higher each month, you need to take action because you're likely getting paid last.
So let's fix that. Pronto.
Here's what you can do:
Charge interest on your outstanding invoices at a rate equivalent to what the credit card companies are charging (21-25% right now). Send updated “statements of account” ("SOA") showing the balance owing (invoice amount + interest charges). None of this 3% or 5% interest-charge-business... we're not doing that.
Send automated invoice reminders through your bookkeeping software when the invoice is 7 days overdue. This is so simple, but so often overlooked.
After sending one automated invoice reminder, I typically follow up with a personal email to the client 7-14 days later (use your discretion on timing).
“Hi [Client X] - I hope you’re having a good week so far. I wanted to touch base as Invoice #xxxx is overdue ($x,xxx.xx). I have a policy to enforce interest charges on overdue invoices at a rate of 24%; however, I’m happy to waive the charges if you’re able to clear up your invoice by [date]. Here is a link to pay via credit card: [provide invoice link, if available]. If you’d like to talk about an alternate payment arrangement, I’m open to that and can provide options, but I just wanted to touch base with you directly to see where things are at. Thanks [Client X]. Talk soon, Tanya
Set a company-wide policy to collect credit card or electronic funds transfer info at the start of your engagement and advise clients they will be charged as invoices are issued. Then, once you’ve done the work and issued the invoice, let the clients know how much their credit card (on file) will be charged. If you’re at all unsure about doing this, I’d recommend double-checking with your fav lawyer to ensure that this is okay before implementing this policy.
Stop work on the client’s project/file if they refuse to pay on time. This is obvi a last resort, but if you’ve sent reminders, charged interest, sent SOAs, and nothing… you should explore this option. I would recommend that this action is clearly communicated to your client such that she is given one last opportunity to rectify the situation.
Some of these suggestions might feel severe… or like they’re “too much.” You might worry - “Will Client X still like me if I send an invoice reminder?” - THIS IS THE WRONG QUESTION TO ASK, MY FRIEND.
Instead, let’s ask ‘Why tf hasn’t this person paid me for the excellent work I did and yet she's posting TikToks from Napa??'
And if Client X writes back something wild like “Are you okay? Your tone sounds off in your invoice reminder email,” that's a MF gaslighter. Ignore her. Set your boundary and move on with your biz.
We are done apologizing for asking to be paid for work that we already did and deserve to be paid for. That's all. The end. 🤷🏼♀️
Have a great weekend.
Take care and talk soon,
Tanya