If you’ve been in business long, you understand how crucial your billing cycle is to the overall health of your business.
Good business leaders understand that laying out a sound billing cycle process can drastically impact their ability to achieve desired business outcomes which can, ultimately, make a big difference on their overall financial position.
With that being said, here are a few insights I’ve picked up along that way that will hopefully help you bypass some of the headaches I’ve experienced in the past.
Let’s dig in.
What is a billing cycle?
Before we dig into the details, let’s start from the beginning.
What exactly is a billing cycle?
By definition, a billing cycle is the time between billings.
For example, let’s say you have a cleaning service and you get repeat business by providing clients a monthly cleaning service. If you invoice your customers at the end of each month for your services, your billing cycle would be around 30 days.
In some instances, billing terms can be negotiated between the two parties. However, in most cases, the party who does the billing often sets the billing terms.
Here are a two additional terms that surround the concept of the billing cycle. Let’s familiarize ourselves with these terms as well before we move on.
- Payment terms – the payment terms of a contract will, essentially, lay out how fast you will get paid. Before you agree to a business deal, you need to make sure that you completely understand the payment terms you’re agreeing to. Should you demand payments be “due on receipt” or will payment terms of “net 30” work?
- Delinquent accounts – delinquent accounts are, essentially, accounts that owe you money after a certain period of time. It’s up to you to determine the exact definition of what delinquent accounts look like. Either way, the idea is to minimize the amount of delinquent debt owed to you.
As we move forward, consider this; what type of impact would not getting paid on time have on your company’s overall financial position?
The impact on business outcomes
When I first started out in business, my collection process was way to relaxed.
And guess what? …it did more than just have an impact on my company’s business outcomes, it nearly put me out of business all together.
The reason for this is because, when you first bootstrap a business, more than likely you’ll be selling to people you know. Chances are, you’ll be tempted to let that person slide if they are late on a payment.
Don’t do that.
If you want stay in business and reached your desired business outcomes, you need to get paid on time. …it’s as simple as that.
In most cases, the businesses I witness spiraling out of control often experience a sequence something like this:
- They start by having a billing cycle that is way to relaxed.
- Many times their invoicing process is late to send out invoices to customers.
- As a result they have a spike in the number of delinquent accounts and delinquent debt owed to them.
- This often results in a negative cash flow and makes it incredibly difficult for them to pay their bills.
- They are not even close to meeting desired business outcomes.
- The compounding problem places them in a terrible financial position.
A good way to help prevent your business from running out of cash is to create what’s known as a cash flow plan.
The ideal invoicing process
The ideal invoicing process happens automatically and results in you getting paid before you even provide the service.
Of course, this isn’t always possible. In reality, you’ll need to gear your invoicing process to your specific industry.
Either way, consider starting with an invoicing process like the one below and adapting it to fit your needs.
Start with a web based accounting system like Quickbooks Online or Freshbooks.
There are certainly a lot of different options out there; these are just the two that I am familiar with.
Next, make sure that your invoices are setup to be sent out automatically on a certain day each month.
Side Note: If you charge a monthly service fee, consider setting up your invoicing process to charge for that service at the beginning of the month rather than at the end. This way you are getting money before you actually provide the service.
If you offer products or one time services in addition to your normal monthly service, consider setting up your invoicing process to automatically include any additional invoices.
Ideally you’ll want to get paid for these additional charges as soon as you deliver them. However, this will ensure that you don’t forget to send out the invoices.
The ideal collection process
As with the invoicing process, your collection process will need to be specific to your circumstances.
However, the overall idea is to get paid as quickly as you can without any hassles.
Start with something like this and adapt it to your business.
Here’s the main point; if you can, you really need to try to accept only credit cards.
If you can, setup your process so that an automatic withdrawal takes places and you are automatically paid each month.
Ultimately, an automatic withdrawal setup may cause you to lose a few potential customers at first. However, when you are bootstrapping a business you simply can’t afford for someone to pay you 60 or 90 days late.
As your business gains some stability, then you can consider accepting different forms of payment.
Side Note: In my experience, most people actually prefer to setup an automatic withdrawal. It’s simply a hassle to print out an invoice and mail in a check these days. The trick is to get them setup this way from the very beginning, though. If you try to get them to switch over later you are in for an up-hill battle.
Of course, not everyone is going to be okay with an automatic withdrawal type setup.
In either scenario, it’s typically good practice to map out your collection process so you know exactly what to do next. Below is an outline of a very general collection process.
Start here and expand as you see fit.
- Friendly Collection Letter – Typically, when an invoice is 30 days past due, you’ll want to send the client a friendly collection letter reminding them that their balance is due. If you can, configure your accounting system to automatically send your clients this friendly collection letter when appropriate. It’s important that the friendly collection letter, in friendly language, layout the consequences of what will happen if they don’t pay. In most cases, people simple forgot, so be nice at this point. At this point, it’s typically a good opportunity to offer to help them setup automatic withdrawal so they don’t have to worry about this again.
- Past Due Letter – If the client doesn’t respond to your friendly collection letter, your accounting system should be configured to send another past due letter at 60 days past due. This past due letter should be friendly but should express urgency in getting the balance paid off. Make sure that your past due letter reminds the client that you will have to suspend their account if the balance is not paid off before 90 days. If it’s still appropriate, offer to help them setup automatic withdrawal to simplify things a bit.
- Demand Letter – At 90 days, if your client hasn’t responded to the friendly collection letter or the second past due letter, your accounting system needs to send them a third “demand letter“. While the demand letter can still be friendly, it needs to inform them that their account has been placed on “temporary hold” due to the account balance being more than 90 days past due. Make sure that your demand letter stats the fact that you are willing to do whatever you can to help them pay the balance. I’ve typically found it more useful to tell them it’s my goal to set their account back up as early as possible rather than simply telling them to “pay me or else”.
*Keep in mind that you want to minimize the number of demand letters you have to send and, ultimately, the amount of delinquent debt owed to you. That means that you’ll need to experiment with this process to figure out ways to get people to pay you faster.
Conclusion
As you can see, the ultimate goal here is to reduce the number of delinquent accounts and the amount of delinquent debt owed to you.
Failing to do so could lead to negative cash flow and, ultimately, a poor financial position for your company.
The good news is, the opposite is easily true as well; you can better your financial position by simply implementing sound processes and closely aligning them with your overall customer service process.
For those of you with experience in this area, what are some insights that you have?