I love writing about these topics; not because they offer the thrills and chills of a great adventure movie, but because of necessity. Many small business owners and startups are so wrapped up in development and sales that they don’t understand why invoicing is necessary on the back end.
A Sale Isn’t Complete Until The Money Is In The Bank
Remember that line, always.
Six months ago I met with a client who had no billing system in place other than a sales slip left behind when product was delivered. He trusted that each customer would remit payment to the address on the sales slip, and rarely called to follow up. He had a mental list of clients, and [thought he] knew who didn’t pay him. He had an accountant, but the accountant only filed taxes based on the sales receipts provided by the owner and an estimated inventory.
Sound Familiar???
It might, and if you do this, then you aren’t profitable.
I started working for this client after explaining that billing his customers via a standard system like QuickBooks will track sales, inventory, customer usage data, will provide a list of delinquent customers, and much more. He was at first reluctant because “my accountant handles it”. When we implemented an accounting system, we were able to show an increase in cash on hand. Why? Billing. We started billing every customer after the sale was made, according to terms, and based on accurate customer data. We collected $25,000 in six months; an increase of $4,000 month over month from the previous six months.
Let’s discuss what information is needed for billing. If you have QuickBooks, or similar accounting software, then please refer to the article on said topic. If you are like the dozens of others who may not want to use QuickBooks, then a simple Excel spreadsheet can be developed to generate invoices.
When you get a bill in the mail, what information are you looking for? On the payables side, we want to know:
- Who billed me
- What did I buy
- What is the purchase order number
- When did I buy it
- How many did I buy
- How much is it
- Where do I send my money
- When is it due
Elementary, I know, but if your invoice doesn’t answer these questions- you may never see your money if you didn’t collect at the point of sale.
There are many other pieces of information to include on your invoice, such as account numbers, invoice number, order number, and more, that could help track the order, delivery, and payment.
Invoices vs. Statements
An invoice is a document which represents a single transaction with one or more part numbers on the order.
A statement is a document which identifies a group or series of transactions in a certain period.
Some companies will send a monthly statement, outlining the customer’s monthly transactions. For the purposes of your accounts receivable and accounts payable, we advise sending transactional invoices and only paying vendors from an invoice which references a purchase order number (more on this later).
Billing Sequence
When do you send the bill? Easy- the day goods are shipped to the customer, an invoice should be generated with the date of shipment as the invoice date. The longer you wait to send an invoice, the longer your customer will take to make a payment. The invoice should clearly be marked with payment terms and due date, along with remittance instructions.
When you generate the invoice, it should be immediately sent by the end of the day of the invoice date.
But…. We leave an invoice at the time of delivery!
This isn’t an invoice, and shouldn’t be considered one. I advise clients to never pay based on a document left at a location and not sent through the mail, email, or fax to the accounting department. It is fine to leave a document for your customer or their location to receive product, but it should be considered only a shipping document. In the case of my story above, I advised this client to leave the shipping slip, and upon successful delivery the office staff will generate an official invoice. We will discuss payables later, but always send an invoice.
My customer gave me a credit card to charge upon delivery
Great! A document should still be generated showing a paid transaction. Consider the invoice to be a legal document from which your customer knows a legitimate sale was made. I always suggest that an invoice be generated for accounts receivable to be offset by the payment being made.
Obtaining Purchase Order Numbers
I always strongly advise sales staff to ask for a purchase order (PO) number when closing a sale. This could be a number issued by the customer, or code generated to link the invoice with the customer’s transaction. It can also be used by your accounts receivable team to research past transactions. Purchase orders are extremely important to both the accounts receivable and payable process. Without PO’s, the transaction cannot be tracked and may not be paid. I have personally been told by very large companies that if there is no PO, then the transaction didn’t happen. There is no reason for your sales force to not obtain a PO.
Thank you for reading. Now go get paid!
There’s much more to it than this. We are happy to help with any questions or issues with your invoicing process.
This information is based on the experience of Ryan Dietrich, consultant and principal at Finance Jack, LLC. Ryan has over 10 years of strategic management accounting experience, and has led finance activities at Fortune 500 companies and small businesses alike. Ryan has developed policy, managed risk, and led teams at all levels. Finance Jack focuses on strategic management in the accounting and finance areas of small business, startups, and scaleups. To contact Ryan Dietrich please email ryand@financejack.com.