According to the Federation of Small Businesses, SME’s accounted for 99.9% of the business population at the start of 2019. This equates to three fifths of the employment and around half of turnover in the UK private sector. On average, 660,000 new companies are registered in the UK every year.
This guide is for those businesses brave enough to be starting up, either through necessity or design, in these strange and uncertain times. We want to help you to get your invoicing system and payment terms fit for purpose, to give your business the best possible chance of survival. It outlines the information you’re required by law to include on an invoice and what terms and conditions it should cover. It also explains how to agree payment terms with your customers and some of the commonly used by large companies.
So let’s start with the basics, and what information invoices need to contain in order to maximise your chances of being paid quickly and with minimal fuss.
All invoices should clearly state that this is what they are, with the word "invoice".
They should also include:
There are additional items needed if you are a limited company, sole trader and/or VAT registered, which can be found here. You can also add additional information to your invoices as you see fit to avoid delays in them being approved for payment.
Here’s a useful template to download.
Terms and conditions - sometimes known as T’s and C’s or terms of trade - are the terms of the contract between you and your customers. They're designed to protect your rights, limit your liabilities and provide you with some security when you sell your goods or provide a service.
Many businesses supply goods and services on the basis of informal, verbal arrangements. However, there’s less chance of a dispute arising if agreements are clearly set out in writing. It's important to get your terms and conditions right. If you don’t, it can be difficult to pursue or prevent bad debt. You may wish to consult a solicitor when drafting your standard terms.
Standard terms and conditions should cover:
You need to make your customer aware of, and agree to, your terms and conditions.
Explain these to customers at the start of your relationship and send out a written confirmation of their order with a copy of your terms and conditions of sale. Offer to discuss any problems they have before you raise an invoice, and ensure these terms and conditions are included when you do. The law allows you to challenge customers who attempt to impose terms and conditions that remove your rights to claim late payment interest or compensation.
If you communicate with customers electronically your terms and conditions should encourage electronic payment, eg via BACS or CHAPS. These systems provide payment certainty and prevent the risk of bounced, missing or lost cheques. You could also consider sending your invoices electronically along with a copy of your terms and conditions, which is much quicker than sending invoices through the post.
Most businesses give some level of credit to customers, but be aware that if customers do not pay you promptly, it can place a considerable strain on your business. We’ve provided some handy tips in this blog to help you to safeguard your cash flow.
When it comes to credit, it isn’t always a case of “once bitten, twice shy”. If a customer with poor payment histories approaches you about working for them or restoring credit, don't immediately refuse unless you are absolutely certain they remain a bad risk. Ask them to explain how their situation has changed and decide whether it makes sense to restore the relationship. As a precaution, insist on stricter terms such as advance payment or cash-only.
You might encourage customers to pay early by offering a discount for early payment, though the level of the discount should always depend on the profits you are making on orders. Early payment discounts can have a positive impact on cash flow and reduce bad debts, but can also tie you into agreements that are hard to get out of without damaging a client relationship should you wish to discontinue this in the future.
Collecting on overdue accounts can be a frustrating experience, but even more so during the start-up period when every pound of revenue counts toward staying solvent and repaying debts. It's certainly not the most pleasant part of being a business owner, but not handling them expeditiously will almost certainly endanger your business's cash flow and long-term viability.
Do what you can to prevent late payments by establishing a standard policy for payment and make your customers aware of them before starting work. Some businesses require all or a portion of the payment up front, while others allow terms such as payment within 30 days after receipt of invoice. Make sure this is clearly stated on your invoice, as well as any surcharges for late payments.
Your collections policy will do no good unless you enforce it. Don’t shy away from a potential confrontation, but nor should you be seeking one. Start by contacting the overdue account and asking politely for an explanation, as how you proceed may be very situational. It may well be that the invoice has been lost or is awaiting approval. A customer with cash flow problems may request extra time. Based on your experience with the customer, you may feel confident enough to allow extra time or instalment payments. Make sure you and the customer clearly understand any compromise. Be flexible, but firm; and don't hesitate to follow up.
If your collection attempts fail, it may be time to turn to an attorney or collections firm. Terms for these services vary; they may require a fee and/or a percentage of the invoice amount, or a retainer. Again, your course of action will depend on the situation. You may decide the amount of the overdue account does not justify the cost and effort to collect. If so, write it off as a bad debt and move on.
For more insight on how much extra you could add to your cash flow and to see if your credit control is as effective as it should be, use our unique cashflow calculator.
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