Does Your Billing Process Provoke Late Payments?
The Importance of Timely, Comprehensive, and Accurate Invoices
A major cause of delinquent receivables stems from failing to meet the customer’s invoicing requirements. A government agency, big box retailer or other large customer often has invoicing requirements that may differ from the industry norm. Your average customer also has minimal requirements that must be met. Another cause of late payments, the longer you take to deliver invoices to your customers, the longer it will take them to send you the payment.
Accounts Payable (AP) departments are typically looking for a three way match between their Purchase Order (PO), your Invoice, and a Delivery record. No match and the invoice will not be approved for payment, but rather set aside pending further manual research. That takes time, further delaying payment. If your customer has an automated AP environment, the payment delay due to manual handling can even be longer.
An Example of Problematic Invoices
You want your customer’s AP function to pay your invoice quickly and in full. Start by asking yourself what can you do to make it easier for them beyond complying with their requirements? One thing that may help is adding some information or verbiage that explains in plain language what product or service you have delivered and are billing.
When generating an invoice, a medical equipment manufacturer client described its products with catalog numbers; e.g. AX456.821 – 240 mghz. In this case, the product was a type of patient monitor sold to hospitals and other healthcare providers. The hospital’s POs would only refer to “patient monitors for the cardiac floor.” Since the client’s invoice did not use the term “patient monitor” or even reference cardiac use, the hospital’s AP Department would put the invoice aside until they could get clarification about the item being billed.
Give your customer’s AP function a little help. It may involve a bit of invoice customization, but it will pay off. Explain what you’re billing: product description, the customer’s reference numbers, the customer’s PO number, dates of service, ship-to location, and so forth.
To help you achieve invoicing excellence, we’ve put together a list of “27 Items to Include on Your Invoice.” Compare this list to one of your invoices to see what you might be missing.
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Problems Caused by Invoice Discrepancies
In addition to needing to be clearly understood, invoices need to be accurate. Sending an inaccurate invoice to a customer will cause several problems:
It may not be paid until a corrected invoice or credit memo is sent to the customer, or it will be paid short creating a deduction - but it all likelihood will be paid late, reducing your cash flow.
It will ultimately cause you to spend substantial extra time resolving the dispute, correcting the invoice and applying the cash.
It will damage your reputation with the customer as a top flight, quality supplier.
You may feel that a customer’s invoice requirements are outdated, unnecessary, or arcane, but in order to receive timely payment, they must be met. Even if customized processing is required to generate an invoice that meets requirements, it is typically worth the extra time and expense to avoid payment deductions, disputes and collection delays.
We hear clients complain that they don’t have time to fix their invoice faults, but in the grand scheme of things they are spending more time correcting the same invoice issues over and over again. In contrast, we had a client put together a Six Sigma team to improve invoice accuracy, and from that alone they reduced their days sales outstanding (DSO) by 10 days, which was about a 20 percent improvement.
The invoicing challenge, moreover, has increased over the past decade as an increasing number of customers insist vendors post their invoices on the customer’s invoice portal or otherwise submit invoices electronically. Comply and you’ll get paid. Noncompliance will delay payment. So, review your customers’ contracts and POs for potential compliance issues:
You need to understand your customers’ order fulfillment and invoicing requirements
Make sure you meet these requirements on every invoice
If there are requirements to which you strongly object, negotiate a change which must then be reflected in an amended PO or Contract. Or, at the very least negotiate a waiver until you can implement the necessary customization so your fulfillment and invoicing processes are compliant.
A Four Step Process to Accurate Invoices
Read every customer contract and/or PO to understand the terms governing invoicing, billing information required, other fulfillment requirements, etc. - then COMPLY! If you cannot comply, you will need to negotiate a chanbe to the contract.
Ensure all participants involved in the order-to-cash process have access to and strictly adhere to pricing schedules and sales contracts. Off-schedule pricing is the biggest cause of payment discrepancies.
Be sure both price changes and PO change orders are communicated quickly to whomever processes orders and invoices.
Understand that automating the invoice process may restrict pricing variations, but that can also be a check against unauthorized discounts being offered.
The Importance of Timely Billing and Billing Adjustments
On top of producing a comprehensive and accurate invoice, immediately generating and transmitting invoices to your customers is also critical to getting paid sooner. The best practice is to process invoices the same day goods are sent or services rendered, or at the very least the next morning. This is because you want to get your invoices into your customers payment process as soon as possible. If you miss the cut-off for your customers check run, you will have to wait for the processing window, which might take you one or two weeks longer to get paid, and even a month in extreme cases.
The following chart is based on metrics derived from the American Productivity and Quality Center’s (APQC) ongoing benchmarking studies. It clearly illustrates the importance of timely billing and adjustments to the payment cycle.
Billing Cycle refers to the time it takes to generate complete and correct billing data
Billing Adjustment Cycle refers to the time it takes to make adjustments when a customer asks for a corrected invoice
Billing-to-Payment Cycle refers to the days that elapse from the date a customer invoice is generated to the date a payment is received
As you can see in the chart, the top performing companies (25th Percentile) take roughly a third of the time to generate an invoice and and to process billing adjustments as do the firms at the lower end of the spectrum (75th Percentile). Consequently, the top performers are paid more than twice as fast as the bottom group.
Clearly, improving the time it takes to make billing adjustments will have the most substantial impact. By reducing the number of adjustments that need to be processed you are eliminating unnecessary work. That alone will enable you to process adjustments more quickly. Consider this as an imperative for improving your invoice accuracy.
Secondly, make sure your adjustment process is as streamlined as possible. You can also devote more resources (man-hours) to the adjustment process, but only after making sure there are no bottlenecks in the adjustment process itself. One last factor slowing things down may be that processing adjustments is not given as much priority as generating the initial invoice – it should be if you want to get paid on time.
Collections Start with the Invoice
A timely, comprehensive and accurate invoice is critical to getting paid as soon as possible. Companies that fail in one of these three areas are wasting man-hours on post-invoice activities; specifically processing billing adjustments, collections, and applying payments to the receivables ledger. For many companies, the biggest collection problems are related to the invoice, not the customer. The good news is that those issues can be readily corrected so you can focus on real collection risks.