Stop unpaid invoices clogging up your cash flow

It takes an average of 44 days for European companies to get paid for goods or services rendered. In France, that average rises to 52 days, according to a study by Atradius. That's more than six weeks between the moment the sale is concluded and the moment the invoice finally gets paid.

With such a blockage to cash flow, it's no wonder that late and unpaid invoices are the number one cause of bankruptcies in France. The problem is felt most acutely by SMEs, as cash flow is often their lifeblood. Many small business owners will be all too familiar with writing letters and emails reminding customers to honour their side of the bargain.

The job may get finished on time. So why, so often, doesn't the payment?

In France, the government has tried to confront the problem by imposing a maximum 60-day limit for paying a valid invoice. Companies face fines for paying late and can find themselves named and shamed on a public register updated by the competition and consumer regulator, the DGCCRF.

Yet, the problem persists. Outstanding invoices clog up a company's cash flow, sometimes leaving businesses unable to pay suppliers, loans or staff and preventing them from taking advantage of opportunities to grow.

So how can you avoid being paid late for your work? Here are our best tips 👇

There is plenty of invoicing software out there that allows you to automate your invoicing and costing process and keep all the relevant data in one place. These are often collaborative tools that allow whole teams to access invoicing templates and create a database of everything that has been sent to a particular client. With this software, you can identify quickly which invoices are still outstanding and this birds-eye view of your estimates and invoices also makes it easier for you to calculate your company's potential or expected revenue. Another plus is the ability to rapidly rectify any invoices sent out with the wrong information and re-send the corrected version to your customer.

With most invoicing software, you can program automatic payment reminder emails, giving you (or your accountant) one less thing to think about in an already busy schedule. You decide on the content of the reminders as well as the timing and frequency with which they're sent. Once that's set up, you just let the software do the rest. You can even get ahead of the problem by sending a little nudge to customers just before the payment is due, a few days or a week in advance. That helps in cases - and they're not uncommon - where clients are a little forgetful or for whom being organized is not their greatest skill. You set the parameters at the start directly into your invoice software, which you're often able to synch with your business account. This automation ties up a lot of loose ends.

A penalty policy for late payments is one way of encouraging customers to respect the pay-by date. Nobody likes to be penalized, right? The forfeit might be a fixed sum or a percentage of the amount invoiced. The precise terms of the penalty would need to be stipulated clearly on each invoice you send. It's also important to communicate this policy if you don't already charge late payment fees, just to make sure customers are aware of it. A message inside the email sent with the invoice would be sufficient to inform the customer.

Sometimes the carrot can be more effective than the stick: rather than impose a penalty for late payment, you might offer a discount for early payment. It wouldn't need to be a large incentive - this does, after all, affect your operating margins - but even 1% or 2% off the invoiced amount for payment in under 10 days can be enough to motivate your clients. They may even be tempted to place larger orders in future, and the offer can also be a useful selling point when trying to attract new custom. This solution is not for all companies as it can negatively impact a business' bottom line. But for companies with chronic cash flow problems, it may be worth thinking about. Any loss in revenue could always be absorbed by setting a slightly higher price at the outset.

This is the first step you should take when a client misses a payment deadline. The polite, gentle nudge can sometimes be an awkward moment for some entrepreneurs, particularly the uninitiated. But it shouldn't be. Asking to be paid for work you've done is normal and all (OK, well, most) customers will understand that.

Either make a call or send a mail to politely inform your client that, unless you're mistaken, their payment is late. There are a handful of very common reasons why an invoice might be outstanding: the payment has already been made and is being processed, the accountant is off sick or on holiday, the client's bank's online platform is down or somebody just plain forgot. The friendly reminder will have no impact on your customer relationship and in most cases will do the trick.

Sometimes a casual nudge won't work. It might have been overlooked or even ignored. Now it's time to move to the next level and send a more formal, written reminder letter, perhaps with the offending invoice attached, asking the client to act. It's a good idea to include in the letter the date by which you expect to be paid. If you still get blanked, send another written letter but this time send it by recorded delivery.

Still nothing? The third written letter should be the last before you move on to more drastic measures (although you may even decide that just two letters is enough). Again, it should be sent by recorded delivery and should make clear that you're afraid that if the customer does nothing to remedy the situation before a specific date, you'll have no choice but to start legal proceedings.

These formal letters do not have any legal value in themselves, but the threat of legal action does have a habit of prompting a response from stubbornly late payers.

If your reminders fail, it's time to move on to a formal demand letter with legal weight behind it. The letter (in France, 'une mise en demeure') should remain polite but must include certain information in order to be legally valid. There are online services to help you write them. It's only after sending a formal demand letter that you'll be able to pursue legal proceedings further if needed.

You've done what you can and shown plenty of good will but still the customer won't pay. Legal proceedings are the ultimate step to take in order to get your outstanding invoice paid. This procedure forces your customer to settle the invoiced amount as well as any penalties they may have incurred. For this you will have to seek professional legal advice.

For small amounts, it may not be worth paying for the lawyer's fees, so consider a debt collection agency. They often pay you the outstanding amount up front (and, of course, take a commission) and then will deal with the rest themselves.

Legal proceedings can be long and costly but are unfortunately the only legitimate way of forcing a customer to pay you what they owe.

Outstanding invoices are something entrepreneurs have to live with; there is no magic bullet to eliminate them all. But reducing the scale of the problem will help make your cash flow more fluid - and it is perfectly possible. The secret is to be proactive and to pre-empt late payments. You might want to consider asking your customers to make down payments when a sale is made, but not all clients will be open to this way of doing business.

Digital, connected solutions have proven highly effective in helping businesses manage unpaid invoices. By automating the accounting process, you get a more holistic view of both your current cash flow and the invoices that are due to be paid in the near future. You schedule your reminders in advance and the software deals with sending them out at the right moment. It's one less thing for you to worry about, so you or your accountant can spend the time gained on, let's face it, less annoying tasks.