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Accountant Emily Coltman gives some advice on getting the basics right on invoicing.
If you’re new to running a business, one of the most important things you need to think about is sending invoices to your customers. After all, if you don’t invoice your customers to ask them to pay you for the work you have done or will do for them, then you’re unlikely to get paid on time.
New research by online accounting provider Freeagent shows small businesses in Britain are likely to be damaging their cash-flow because they wait too long to chase unpaid invoices. Their survey of 500 small business owners shows just one in six said they would chase an unpaid invoice within the first week after it was due. Nineteen per cent would wait one to two weeks to chase an unpaid invoice, while 23% said they would wait two weeks to a month.
The survey showed 18% of small business owners polled usually chase unpaid invoices within one to two months, four per cent said it took them between two to three months and two per cent said they waited three months or longer before requesting payment for an outstanding invoice. A further four per cent admitted that they never chased unpaid invoices at all.
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Before businesses start sending out invoices, however, there are some important details that they need to get right on them – to ensure they stand a good chance of being paid promptly by their customers.
Here Emily Coltman ACA, Chief Accountant to FreeAgent, highlights five key things to remember when creating invoices.
Your invoice is a document that you send out from your business, so make sure that it reflects your brand. Think logo, colours, fonts, and wording of the item descriptions and of your payment terms. For example, if the brand message you want to convey is “fun and quirky”, make sure your payment terms are not written in lawyers’ English.
There is some information that you must legally include on your invoices.
If your business is a limited company or LLP, your invoices must show its Companies House registered number and address, and if you put the name of one director / member on your invoice, you must include the names of all the directors / members.
If you’re registered for VAT you must include your VAT number on your invoices, and comply with HMRC’s rules about VAT invoices.
For sole traders who are not registered for VAT, you’re not subject to legal requirements like these, but I would say it’s best practice to keep to the same rules as for VAT invoices, except of course that you would not charge VAT. This is to help make your invoices look most professional and avoid any queries from either HMRC or your customers. In particular, if you use sequential numbering for your invoices then HMRC can easily see that you have reported all your income.
It’s important to make sure “The Price is Right!”, because otherwise you could find yourself in the very embarrassing position of either having to ask your customers for more money, or give them some back.
When you include your quote in your invoice, make sure you use your most recent pricing – and don’t forget any discounts or special offers that you might have promised to all your customers or to just this particular customer.
Remember that if your business is VAT registered, HMRC say that you must include the price per unit on your invoices.
Avoid queries from customers by making the description on the invoice of what you are selling them as clear as you can. If a customer has to phone up to query an invoice, they may see this as poor service on your part, and it may also mean they take longer to pay.
Furthermore, make sure this description is displayed prominently rather than being hidden in small print, so that your customers don’t miss it. Try using a free invoicing tool like Invoice-o-matic, which provides a customisable invoice template that presents this information clearly.
Make it as easy as possible for customers to pay you. Include your bank account details on your invoices if you are taking payment from online banking or by BACS. If you send your invoices by email and use a service such as PayPal or GoCardless to collect payment from customers, include a link when you email the invoice, so that customers can pay with one click.
Remember that it’s for you to decide how quickly you want to get paid. Set your payment terms and make sure your customers keep to them!
Make sure that your invoices are clearly laid out with all the information a customer needs. Your aim is to make your customers’ lives as easy as possible, because that way they will come back and buy from you again. Remember, happy customers are more likely to refer more people to you!
*Emily Coltman ACA is Chief Accountant to FreeAgent, who provides an award-winning online accounting system for small businesses and freelancers. Try it for free at: www.freeagent.com