The Invoicing Trap
Welcome to the first in our blog series ‘Show Me the Money’, where we walk you through how to get paid faster for the work you’ve already done. Today, we look at what we call the Invoicing Trap.
TL;DR
When you deliver or do work and send an invoice, there's nothing forcing your customer to pay you on time (or at all). This creates the 'invoicing trap.' You're stuck waiting 30+ days for payment while still needing to cover payroll, bills, and other expenses. The stress compounds when good work leads to bigger orders you can't afford to fund upfront.
The single best thing you can do is call accounts payable after submitting every invoice and ask two questions. Do you have everything you need to pay this? and Which cheque run will this be on? AP and the person who hired you don't talk to each other, so nobody will think you're desperate, you're just being professional. A red due-date stamp on your invoice also helps it get sorted and paid faster.
If the cashflow gap is still killing you, factoring companies like Capital Now will buy your invoices and pay you the same day, so you're not the one stuck waiting.
The invoicing trap is a huge hidden issue for business owners. A business owner will go and do some work or deliver a product and then expect to get paid. You don't normally anticipate that you must also make out the invoice according to your customer's preferences, submit it the correct way and then wait for them to pay on their terms.
Most business owners don't account for the invoice process or the fact that they will have to wait a certain number of days to get paid. The trap is that you don't get paid right away for the work that you do. Beyond that, there's no obligation for your customer to pay the invoice. They always have the right to dispute and sometimes they can return a product. In fact, they can come up with any number of different excuses to pay you less, not pay you at all, or pay you on a schedule that suits them rather than the terms that they committed to. It's not against the law.
At the Mercy of Your Customer
In essence, you're at the mercy of your customer, and that's an unbalanced position to be in. One of the things that we like to do is to rebalance that relationship. For instance, you could always go and take your customer to court to get paid, but that's not necessarily a great idea. It's a short-term business plan because if you take your clients to court, the chance of you getting more business with them is probably diminished. The good news is that over the years, we have found that if our clients do certain things, we can pretty much guarantee that they're going to get paid and paid in full. That's what we'd like to do here. We'd like to show you how to do that for yourself.
The Cost of the Invoicing Trap
The first cost that business owners pay is their peace of mind. It's big, and it occurs on a few levels. They don't know when they're going to get paid. It's an unknown, and most people who sell and provide goods and services don't generally like to harass their customers for payment because it changes the relationship. They don't want to be the bad guy.
The second cost is harder to calculate. That's the financial cost. For example, typical commercial payment terms are 30 days after the invoice is submitted. After that, the company will pay the bill.
Unfortunately, most business owners must pay their bills and their payroll more than once every 30 days. They can be in a position where they must make one or two or three payrolls. If they're paying their employees or contractors bi-weekly, their bills come in at the end of the month. That might not correspond to when the money comes in from their customers. Business owners will potentially be out about one to two times their monthly revenue waiting to get paid. If they typically bill $10,000 a month to get through to payment, they should have about double that on hand in reserve cash.
The mental stress, as well as the financial stress, is immense. If you talk to business owners, they'll normally say that their biggest concern is not making payroll. Not paying your people on a Friday, for example, is a very, very personal and difficult thing. This is what gives business owners night sweats. The reason is that they lose face. They lose reputation. Their employees will think, "Well, you can't afford to pay me. Maybe I can't afford to work here." They think you're at least unstable or inconsistent, that you're weak financially, somehow. They think you can't protect their interests as the employees.
It's the reputational risk of not being able to keep your promises to your staff, to your family, to the people you buy your supplies from, even your credit card company. Business owners want to pay for everything on time. Reputation is very important because it's one of the few things they have, a key value in their business and their enterprise. Stress is very personal, as we all know, and it is very significant.
Missing Payroll
What we've described so far are common payment terms. You submit the invoice, and you're going to get paid within 30 days. The truth is that it doesn't happen like that very often. As we said, you're going to submit your invoice, and then 30 days later, you're going to get paid. So right there, you already have a few days added on for the invoice submission.
What is becoming more and more common is that our client's customers want to extend their payment terms. It's in their best interest to take as long to pay as possible. This means that instead of missing two or three payrolls, you, as the business owner, might be missing eight payrolls.
The issue also becomes you don't know when you're going to get paid. Let's say you assume you're going to get paid in 30 days, but then you missed the cutoff for submitting your invoice. Now, unexpectedly, you've been delayed by another 30 days. There's this constant unknown, and the fact that there's no certainty makes it so you can't plan.
You can't take on new business because you don't know if you can afford the upfront costs of a new project. It's hard to make any promises to anybody, so you end up not being able to say anything. You start to avoid answering the call. You start to avoid taking on new projects. It starts to compound and snowball, and you start to lose confidence as a business owner. What will kill a business comes down to two things: lack of cash and lack of confidence in the owner.
Insider Advice
To give you a peek into the process, let us share some helpful tips.
When we send an invoice as a business, we always follow up to confirm that the customer received the invoice. For instance, let's say you've finished the work and submitted the bill the way the customer requested it to be submitted. Then you follow up with a phone call and say, "Have you received this invoice?" Hopefully, the answer is yes. The next question is, "Is everything to your satisfaction? Does everything look like it's in place?" Again, they will say yes, and then you say, "Which payroll do you expect us to be on?" For instance, ask them which cheque run. Now, if there's going to be a delay (e.g., you missed the cutoff for the next payroll), you know immediately that you will need to factor in another two weeks to 30 days until you are paid.
We have found that following up to make sure that a customer received the invoice, to make sure everything is okay to pay, is probably the number one thing you can do to ensure that your invoice will get paid.
Here's another quick tip. You could put a nice red sticker or stamp in the middle of your invoice that has the invoice due date on it. The way that accounts payable works is that they take in all the invoices and sort them. They are usually sorted by the due date. You're going to help them out by having that nice, big, easy-to-find indicator of when that invoice is to be paid right on your invoice.
Getting Out of the Invoicing Trap
Most of our clients, when they come to us, are in the trap. It manifests in different ways, but basically, they're out of cash. They can't finance the business. They can't finance the money. They're waiting to get paid indefinitely. Often that's how they come to us.
However, there's one other thing we've noticed that happens when a business owner delivers a product or performs a service and does it well, and most of our clients do their jobs very well. Their customer says, "That was great. We're going to give you a bigger order. We're going to ask you for more products or more services." This is where the problem compounds itself. Not only have you not gotten paid for the first invoice, but you also take on bigger expenses to fill these larger orders. Your deficit, or cash flow shortage, or operating capital shortage can easily triple and quadruple because you're good at what you do.
This is a real problem for people who are doing the right thing for the right types of customers and still cannot finance their good work. We do want to be clear about something: the job of larger companies is not to delay payment. Their job is not to avoid making payments. Their job is to make the payments. That's what accounts payable does.
It's the cumbersome internal processes at these companies that result in your not getting paid when you expect it. They cannot pay in less than 30 days because, in many cases, that invoice and the documents will have to go across seven different desks before it's approved for payment. Any number of things can happen at any one of those desks.
The solution is to use a service like ours, where we pay you for the invoices. If we come on board, we buy the invoices that are already out for payment, which gives the owner the cash they need to do what they need to do. It also gives them the confidence to take on larger orders and continue growing at the pace of their ability to work instead of finding credit.
Your Homework Assignment
If we were to give somebody a homework assignment after calling accounts payable to make sure the invoice had been received, the next step is to look at the facts. A lot of business owners know they're not getting paid on time. They keep it all in their heads, but let's face the hard facts. Look at your accounts receivable and see what's going on. The homework assignment is to call and follow up on these invoices, even if they're not overdue.
That's where another trap comes into play. Business owners don't want to follow up on their invoices because they don't want to seem weak, as in, "I need the money." They don't want their customer to think they need the money, which is a little ridiculous when you say it out loud. They also don't want to seem pushy. They want to seem like the good guy, that it's not a big deal, that they're very understanding.
Get over that fear of calling accounts payable. There is a little secret most people don't know. Accounts payable and the person who gave you the job in the first place don't talk to each other. The person who ordered the work is not going to know that you called accounts payable and asked, "When is our payment coming?" This is a legitimate question. You want to know the status of your invoice. The minute you know the status of that invoice, you can plan the next stage of your business.
What to Say on the Phone
There are two things you can say when you call. In more than 20 years, we've learned this is all you need to ask. You can call and say, "Do you have everything you need to pay that invoice?" The answer will be a yes or no, or maybe. Based on that answer, you respond with something like, "I'll get you that information," or, "I'll make sure that's straightened out," or fix whatever they need to approve the invoice. The second question is, "Do you know what cheque run that's going to be on?" That's all you need to ask. So that's your entire invoice verification process in two questions.
You aren't pushy or demanding. You're asking for information, and they're happy to provide you the information. As we've said before, it's their job.
Accounts payable, by the way, hates chasing people around when their invoicing isn't perfect. They don't like calling to say, "You didn't attach the PO, there's no receipt, there's no bill of lading, there's no…," whatever it might be. They will put those imperfect invoices aside for when somebody can get to it or when the vendor calls.
They don't like trying to find somebody to call to get that invoice paid, so they put it on the corner of their desk and wait for the person in question to call because they want to get paid.
So rather than making it their job to follow up on your invoice because you didn't submit it correctly, for whatever reason, they wait for you to call. The sooner you call them, the sooner you will know you have a problem, and the sooner you can remedy it or know that the cheque is on its way, and you can relax.
