How to Use Your Invoices to Increase Cash Flow

Struggling with long payment terms or late payments from your customers? Here’s how to leverage your invoices to meet cash flow demands.

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Struggling with long payment terms or late payments from your customers? Here’s how to leverage your invoices to meet cash flow demands.

According to an Intuit study, almost two-thirds of small businesses worldwide struggle with cash flow.

Cash flow — the amount of money going in and out of your business — is crucial for the success of any venture. Without enough funds on hand, your small to mid-sized business can’t afford to cover everyday expenses like salaries, loan payments or inventory.

As the world recovers from the COVID-19 pandemic and inflation rises, late invoice payments from your customers generate more uncertainty and business risk. Even if you’re making a lot of sales, late payments can create a negative cash flow and impact your business.

Your customer invoices provide a valuable opportunity to increase cash flow.

A reliable cash flow also ensures that you build good credit with banks, which you will need if you want to apply for financing and support business growth.

Your customer invoices provide a valuable opportunity to increase cash flow. There are several steps you can take to encourage prompt customer payments through invoicing. This will increase your cash on hand, allowing you to cover all of your expenses and plan for new business opportunities and growth.

How can you create an invoicing strategy to increase cash flow?

Establish payment terms that work for you

Payment terms determine when and how your customers provide invoice payments. Set clear terms that promote timely payments so you can establish a more consistent cash flow from the beginning of each client relationship.

There are several factors to consider when setting your payment terms:

  1. How the customer will pay the invoice. Customers are more likely to pay your invoice on time if it’s easy for them to pay. For most customers, this means providing digital payment options like credit cards and payment processing services.

  2. How long they have to pay the invoice. While 30-day payment periods are standard, some larger enterprises may request payment terms of 90–120 days or more to increase their own cash flows. This can cripple small to mid-sized businesses. Aim to negotiate the shortest payment period possible. Even minimizing the period to 15 or 21 days will make a difference in your cash flow.

  3. Whether prepayments or deposits are possible. Depending on your industry, prepayments or partial upfront deposits might be common. Do your research and take advantage of any opportunities for immediate cash.

  4. What happens when you don’t receive payments on time. Negotiate a late payment fee (1.5%–2% is standard) to discourage overdue payments. Some businesses use the suspension of goods and services as a penalty for late payments.

Forecasting your cash flow will also help you optimize your payment terms and understand how much flexibility you can afford to offer customers.

Review and optimize your invoices

At worst, sending incorrect invoices will result in nonpayment. At best, it’ll delay payment while you correct and resend the invoice. To avoid this scenario, make sure you review invoices thoroughly before sending them to the customer.

Invoicing software can streamline this process by tracking customer expenses more accurately and generating invoices from that data. Some invoicing software provides electronic payment options, which makes it easier for customers to pay quickly, as well as automated reminders if the due date is approaching or has passed. These programs can also help you visualize customer payment data over time so you can easily keep tabs on paid and outstanding invoices.

Invoicing software can help you visualize customer payment data over time.

Pay attention to the wording you use in your invoices. A 2019 FreshBooks study found that using the terms “thank you” and “please” in an invoice correlates to faster customer payments. You can also request confirmation of receipt in your invoice to maintain customer communication and make sure the invoice hasn’t slipped through the cracks.

Lastly, send the invoice as soon as you can. This bumps up the due date so that you can get paid earlier.

Use early payment incentives

Offer your customers a small discount for early payment to get cash even sooner than the payment terms you agreed on. Early payment discounts enable you to receive early payments without having to take on additional debt.

This helps you accelerate your cash flow and control how long it takes accounts receivable to get cash (a metric called days sales outstanding, or DSO for short). Early payment discounts are also more cost-effective than other financing options — like lines of credit, business loans or invoice factoring — used to meet cash flow shortages.

Unique programs like Name Your Rateallows you to decide the rate you’re willing to offer customers for early invoice payments.

Early payment discounts can be applied in a variety of formats — including flat discount rates or fluctuating discount rates that change based on how early the customer pays the invoice. C2FO offers unique programs like Name Your Rate, which allows you to decide the rate you’re willing to offer customers for early invoice payments.

Do some research to determine which type of early payment incentive works for your business.

The payoff

If you’re a small to mid-sized business owner, you’ve probably experienced cash flow issues, especially in the current economic climate. Pursuing traditional financing options is one way to fuel your working capital — but a good place to start increasing cash flow immediately is by optimizing your invoicing process.

This usually starts with forecasting your cash flow, establishing payment terms you can realistically afford and using software to deliver more accurate invoices as soon as possible.

For small to mid-sized businesses, early payment discounts are also a reliable and cost-effective way to boost cash flow so you can grow your business.

Interested in early payment discounts but not sure where to start? Learn more about using an early payment platform to increase cash flow.

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