Putting in place a successful credit control and sales ledger team can help your business get the money you have earned into your bank account in a timely manner and give you control over how your company manages its finances.
The sales ledger process involves claiming the payment for the work your firm has carried out through an invoice designed to prompt timely payment. The invoice needs to include all of the information your customer needs to get the cost approved and invoice paid. There are also tax rules that need to be adhered to.
The aim is to match the income to the period the work has been carried out in. This is important in producing your firm’s management accounts.
A vital part of running a successful sales ledger is to avoid invoicing mistakes and not to give your customer a reason to delay payment. By raising an accurate, clear sales invoice, it will make the job of credit control easier too.
1 - Get the details correct
Payment of invoices can be delayed if the details on the invoice are wrong. You need to get the trading name of the company and their address correct as well as the correct details and price of the service or goods you are selling.
If you get any of the details wrong the invoice could be sent back to be amended and cause a delay in payment.
2 - Set out the invoice clearly
Your company should use a sales invoice template that prompts you to complete the relevant fields when you are able to raise an invoice. This should typically include the correct name and address of your customer and your firm, the date, invoice number, purchase order number, job reference, company registration number, VAT reference with the unit cost and VAT cost set out on separate lines and the total cost including VAT.
3 – Negotiate payment terms
It is important to negotiate payment terms to the level your business needs because once these are set it can be very difficult to change. Do not agree to payment terms you are not happy with however tempting this may be to win a piece of new business as it’s much harder to change at a later date.
Try and agree terms so that you get paid as soon as possible. 30 days from invoice date from end of month when the service was provided are a good aim to have, though standard terms vary from industry to industry.
Once payment terms shave been agreed with a customer, it gives your firm certain rights on recovering money owed once the payment has not been received by the due date.
4 – Be strict on credit
If a customer exceeds their credit limit consider stopping them from having any more goods until they have made a payment to get below the credit limit. Sometimes taking a firm approach is the best way to prompt payment but clearly you have the ongoing relationship to consider and oversights might be just that so always pick up the phone first and speak to your customer.
You can consider increasing their credit limit once they have proved that they are reliable payers.
5 - Include a valid purchase order
Once you begin a job, your sales team should get a valid purchase order from the company you are working for.
It is important to include this information on the invoice because it means approval of your invoice is more likely to occur promptly because the purchase order will be used by the firm you are working for to approve the costs on the invoice.
6 - Include full details of the service you provide
This will make it easier for the person who needs to authorise the invoice to do so. By giving a clear description of the services or goods you have provided, along with a job number if you have one, means the invoice is likely to be processed quicker and paid faster.
7 - Include payment terms on the invoice
Your business should establish payment terms with companies or individuals you provide a service to. These will vary depending on the customer and what your firm has negotiated.
By including the agreed terms on the invoice it acts as a reminder to the finance team of the firm you are awaiting payment from to pay your invoice in the agreed time. This won’t always happen but it gives you a structure to work to and something to go back on if things do slip
8 – VAT
HMRC says that if you are a VAT registered firm providing a service that is not exempt from VAT to a company that is also VAT registered, you need to raise a VAT invoice.
If your firm is VAT registered, you need to include VAT on your sales invoice and include the VAT registration number of your company. This is required for tax and VAT purposes but is also needed by the company you are invoicing for their VAT records, so they can claim back the VAT on the purchase. Failure to do this could cause the invoice to be sent back and delay payment.
Get more information on the legal requirements from this link to HMRC’s website - http://www.hmrc.gov.uk/vat/managing/charging/vat-invoices.htm
9 - Staged payment invoices
If you run a small company that is expanding, the cashflow of the business can be under extreme pressure, even if your firm is doing well.
This is because as a company wins bigger jobs, it increases the amount you have to pay out in advance to complete the job before you receive payment for the job.
In this scenario, your sales director and finance director may agree that you can invoice at certain milestones in the job. This will help with your firms’ cashflow and help pay for other parts of the project costs as you go along.
When raising a stage payment invoice, you need to get the details correct to ensure prompt payment. Make sure you clearly state the proportion of the job you are invoicing for and what stage the individual invoice relates too.
10 - Include correct bank details
Your invoice should have the correct company bank account details on it to make it easier for your customer to pay you and in order for you to get the funds into your account in the quickest timeframe
This should include your trading name, the bank name, sort code and account number.
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