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Optimising your accounts receivable

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The GoCardless content team comprises a group of subject-matter experts in multiple fields from across GoCardless. The authors and reviewers work in the sales, marketing, legal, and finance departments. All have in-depth knowledge and experience in various aspects of payment scheme technology and the operating rules applicable to each. The team holds expertise in the well-established payment schemes such as UK Direct Debit, the European SEPA scheme, and the US ACH scheme, as well as in schemes operating in Scandinavia, Australia, and New Zealand. See full bio

Last editedJan 20245 min read

It's sensible to start with the flow of money into your business. This comes down to a simple rule – ensure you get paid promptly for the goods or services your business provides.

However, simple rules aren't always so simple to put into practice. There are many possible reasons why your customers may be dragging their feet in paying you.

Understanding those reasons will help you find ways to reduce the time it takes for them to pay you.

Why aren’t invoices paid on time?

The causes of late invoice payment can be broken down into two main categories – internal causes that come from within your business, and external causes. The internal causes are directly under your control; the external ones less so, but you can still influence them.

Internal causes include:

failure to invoice promptly
failure to include all necessary details on invoices
failure to invoice at specific milestones on larger projects
failure to invoice for necessary materials and other items up-front where possible
failure to account for time and materials in full
failure to negotiate – and enforce – strict payment terms
failure to confirm receipt of invoice (by phone, for example)
failure to send invoices electronically, risking them being lost in the post
failure to run regular ageing reports to keep tabs on late payers
failure to chase late payment early and effectively

External causes include:

delays in processing invoices manually
cash flow problems resulting in delayed payment to suppliers
mistakes when entering payment details (less likely with e-invoices)
multiple payment sign-offs required from several people
deliberate non-payment to boost cash flow (unethical but it does happen)
customers going out of business or suffering financial problems

“We tend to find it's the larger companies that tend not to pay on time. There's always a chain – the SMEs do the work and think they'll have regular income, but it ends up taking 90 days. That hasn't improved, especially in the construction industry.” - Alex Falcon Huerta of Soaring Falcon

Late payment culture

If you're suffering from problems with accounts receivable, it may be reassuring to know that your business is not alone. The scale of the problem is huge and affects small business around the world. Just 42% of invoices are paid on time in Europe and Xero research found that poor cash flow is responsible for almost half of small business insolvencies in Australia.

“Currently the working capital cycle is under pressure from both sides. Suppliers are looking for earlier payment to deal with their own funding or cash flow issues and customers that are taking credit seem to be taking longer to pay. I was discussing this issue with a business in the fashion sector with a customer that has just extended their payment terms from 90 to 130 days. This puts huge pressure on the business as they are significant customer to the business that they would not want to lose. This extended credit period can't be negotiated with suppliers so their working capital cycle is now 40 days longer!” - Bobby Lane, Partner at Blick Rothenberg

Despite a huge amount of awareness and some government initiatives around the world, it takes time for this kind of culture to turn around. That is, for businesses to understand that they need to pay each other – especially smaller ones – faster so that their suppliers don't go under. But time is the one thing smaller businesses don't have, at least not when it comes to cash flow. So it's important to do everything you can to encourage your customers to pay you, and fast.

So, how can you optimise your accounts receivable and make sure you get paid on time?

Make it easy for your customers to pay you

If you can make it easier for your customers to pay you faster, your cash flow will improve. So that should be your goal. One way in which you can achieve this is by offering your customers a different method of payment, one that removes the requirement for them to do anything in order to pay you.

This is the big difference between 'push' payments and 'pull' payments. A 'push' payment method is one in which the customer has to actively make the payment happen, for example by making an online banking transaction. A 'pull' payment method is when the provider of goods or services can take money directly from the customer on a pre-approved basis.

Direct Debit is an example of a 'pull' payment method, and providers like GoCardless make it easy for you to get set up and start taking payments. Once authorised, you can take payments from customers whenever payment is due, without waiting for their own internal accounting processes. This alone can cut your invoice payment times dramatically.

“Payment terms should be clearly defined at the beginning of a sale. We recommend GoCardless and a credit card provider.” - Cheryl Price, Accountant at CH Accountancy

Sticks and carrots – encouraging your customers to pay you faster

Some customers will pay you promptly, regularly and without fuss or hassle. Others may need reminders and incentives to pay the money they owe you. This doesn't necessarily mean that they're bad clients, just that payment of invoices may be a time-consuming process for them, and one that isn't given a high priority.

“We have a client who does photographic work for a large organisation, and the process to get the invoice paid is: send it to a certain person, who reviews it, then passes it on to another person for it to be assigned a purchase order. Then it goes back to the original person, then back to us for the PO number to be applied, then back to them, then back to another person in accounts, who then raises payment. Once that's all done they pay relatively quickly, but this client has issues because the process sometimes falls down.” - Joe David, DS Accountancy

Sometimes incentives can help to make clients prioritise paying on time – positive incentives to pay, and negative incentives against non-payment.

Positive incentives include discounts for prompt payment. For example, you could have a sliding scale of prompt payment discounts on your invoices: 5% off if paid within 7 days, 2% off if paid within 14 days, otherwise full payment.

Negative incentives for non-payment include charging interest on the total amount due if it's not paid within a certain time-frame. If agreed up-front as part of a contract, you could legitimately charge interest for overdue invoices. Speak to your accountant or bookkeeper for more advice on when and how to implement this.

Positive and negative incentives are two sides of the same coin, but think carefully before applying them. Discounts represent money lost from your bottom line, while penalty charges run the risk of alienating your customers if they aren't applied fairly. However, when your money – and therefore your business – is at stake, it's often better to take action than to passively wait for the situation to improve.

Practical tips for getting paid faster

“When it comes to your business, you need to be in control. It's your game and your rules. If people don't want to play by your rules, they don't get to play.” - James Ashford, Founder, MyAccountancyPlace

Depending on your type of business, there are various ways of getting paid faster. The important ones include:

Ensure your invoicing process is smooth and efficient. Read through the “Why aren’t invoices paid on time?” section of this guide and go through the list of internal causes. Do any of them apply to your own invoicing process? If so, fix those problems now. (See our invoicing guides for the UK and Australia for tips on invoicing best practice)
Switch to a regular monthly fee instead of irregular invoicing. By persuading your clients to pay a monthly fee, as a retainer or as a package charge, you can simplify their budget and yours. This also allows you to take money from them via Direct Debit, a 'pull' method that makes it more likely that you'll be paid on time.
Be proactive in chasing late payers. You – or your bookkeeper or accountant – should be keeping a close eye on your accounts receivable. By creating regular ageing reports that clearly show outstanding debt, you can then chase late payers proactively, ensuring that no money falls through the cracks.
Set up straightforward payment methods. Don't limit payments to bank transfers and cards. Think about using an online payment gateway or accepting Direct Debit payments. Anything that makes your customers' lives easier should result in faster payments to you.
Using accounting systems with online invoicing Most accounting software can handle online invoicing, either as part of the package or as an add-on. Start using it, because it removes the risk of invoices being lost in the mail and also allows your customers to pay you immediately.
Get better acquainted with your customers. This isn't always possible, especially if you have hundreds or even thousands of customers, but for businesses with a smaller number of major clients, it can help. Get to know the people who sign off invoices, let them know how important prompt payment really is to you. Sometimes the human touch can make all the difference.
Set SMART goals - Setting performance goals for accounts receivable can help you optimise your process and reduce the time it takes for your customers to pay you.