A significant proportion of any business’s cash-flow is tied up in invoices, also known as account receivables, putting pressure on the accountant or accounting departure managing the cash flow. Managing invoices and chase late payments can be time consuming and resulting in high cost. Digital invoicing is one of the answers to reduce outstanding invoices and improve cash flow. Below is outlined how digital invoicing can help organize and manage invoices without increased effort and cost.
- Keep invoices and records organized
The first step to reduce outstanding invoices is to make sure you know exactly which invoice exists, what has been paid and what is still outstanding. Carefully keeping track of this information is not always a given thing within companies. This becomes easier with digital invoicing as that already provides a standard invoice template, keeps an overview and automatically give reminders when payments are due. Also it is useful to use a digital invoicing software system that marks each incoming payment against an invoice number to know which invoice is paid or still open. Not all digital invoicing software system automatically keep track of incoming payments, in case it is not automated make sure such a process is set up manually or make the decision to switch your current software system. Another point to think of is that although a software system comes with an invoice template, you must ensure that accurate and detailed information is entered into the fields provided. This might not seem so important to you but your customer does receive probably a lot more invoices and might forget where your invoice was for. The following is recommended in terms of information to fill in:
- Provide detailed information of the service or product item that you and your client can understand at any time.
- Have a correct due date.
- Make sure the customer details and your details are accurate at any time.
All above will minimize the chance of confusion on the part of the client, or the client’s accounting department. Reducing confusion means reducing the time the invoice is paid.
In addition keep track of any detailed record to back up the invoice. Records can include any agreements or other materials important for the invoice. This way you can back up an invoice in case there is a dispute.
- Offer discount and charge late fees
To speed up invoice payments you can offer a discount on the total amount of the invoice when it is paid early, and charge a fee (flat fee or small percentage over the total amount) as a penalty when the invoice is due. Make sure both fees are communicated when sending the invoice to avoid communication and additional disputes. With digital invoicing such information can be added and communicated easily
- Follow up regularly
Most companies and people have the intention to pay their bills on time but reminding them from time-to-time does not hurt. It is proven that having a pro active strategy in place reduces the time invoices are paid. Think of a reminder sent to the customer a week before the invoice goes due. A reminder can be send via email, however, often emails are not often read. Another channel for sending reminders could be SMS or Whatsapp. In case that that does not help, a phone call or visit to the customer can do the trick. When visiting you can print out the invoice in case digital invoicing does not work. Sometimes it can also help to follow up with the original invoice attached. The invoice might have been lost and the customer will appreciate that you shared the invoice instead of them following up.
In every move try to find the right balance with staying professional but also making sure to point out the urgency of paying the invoice, especially when the invoice is due. If any of the follow ups doesn’t have any effect and the invoice goes due try to understand why they defaulted on their invoice, there might be a logical explanation. For example the customer has financial difficulties or are tight in cash. In that case consider offering a payment plan. You may receive a smaller payment each month, but it’s better than nothing.
Digital invoicing software systems give you the overview you need to know exactly what the status is of each invoice. It helps you reduce the workload and save time and cost round managing invoice. However having a digital invoicing software system does not mean all work is automated, it is important that data is entered correctly, especially data around due date or matching incoming payments. Wrongly accusing a customer of not paying its invoice might hurt the relationship and your reputation as a business.
In an ideal world an invoice gets always paid. Unfortunately this is not always the case, we provided two extra steps if step 1 to 3 does not help.
- Debt collection
If the invoice goes due and no response is given, you might consider hiring a debt collector. Before hiring a debt collector ask these three questions:
– Is the invoice large enough? The debt collector might charge more than actually outstanding.
– Does the customer actually have money? They might be in financial difficulty and not being able to pay in any case.
– Will the debt collector be able to find the customer? This is harder with individuals, in case it is a company they usually have office premises.
- Write off outstanding invoices
When nothing of the above works there and the invoice keeps outstanding, consider the outstanding amount of the invoice a bad debt expense. It does not matter if you do digital invoicing or manual invoicing.
There are two common methods for reporting the amount of bad debts expense:
- Direct write-off method
This method requires that a customer’s actual non collectable amount be removed from the
debtors list and recorded as a company expense.
- Allowance method
In this method, the company proactively reviews its debtor’s list and estimates what portion can be recognized as a bad debt, even before getting the exact figures are determined. In this scenario, the company debits a bad debts expense and credits a separate allowance account. This allowance can accumulate across accounting periods and may be adjusted based on the balance in the account.
What method is acceptable for Tanzania tax purposes ?
As per the Income Tax Act, a non-financial institution (a company that is not in the business of
lending money) can claim a tax deduction for bad debt expenses, subject to the following conditions:
- The debt must have previously been included in calculating the Company’s taxable income.
- The debt must have been written off as irrecoverable in the Company’s books of accounts for that year of income in which the debt is claimed to have become bad. This is consistent with the direct write-off method above.
- The company must have taken all reasonable steps in pursuing payments and reasonably believes that the debt cannot be recovered. Evidence of this process is important in the event of a tax audit.
The information about Write off outstanding invoices comes from a publication of Cassian
- Direct write-off method