Running a startup can be an exciting endeavor ripe with opportunities, but the risks are high, and not preparing for them can harm your growing business. And preparation is one of the cardinal rules to success. Startups fail for many reasons, but money is a major root cause. In our post, Why Startups Fail – Getting To The Root Of Causes Failure, we report that 29% of startups fail due to running out of cash. However, running out of cash has recently become the top cause of startup failures. Mismanaged finances, high burn rates, poor revenue generation models, and more can prevent fledgling companies from reaching their full potential. What does this mean? Cash flow should be your priority when managing startup finances. One crucial aspect of cash flow to tackle is billing management.
While billing is one part of the startup finance equation, and though it may seem like a no-brainer to deal with, it’s actually a precise and delicate process that requires utmost accuracy and efficiency to ensure your business is getting paid properly. Not paying attention to your billing process or invoices can impact your customer relationships, financial health, and reputation.
Let’s ensure that you’re better prepared to manage your startup’s billing so everyone can stay happy. Whether you’re a SaaS startup, e-commerce startup, consulting firm or agency, healthcare startup, fintech startup, or edtech startup, you will find these billing management tips to be insightful and impactful. Here are three of the top billing management tips for startups:
1) Standardize and clarify your invoices and payment terms
It’s ideal to have good relationships with your vendors, clients, and customers. However, mismanaged billing and unclear payment terms can erode trust in your startup and tarnish your reputation. As such, standardizing your billing process is crucial for ensuring customers are billed accurately and timely. Start by establishing clear payment terms, such as due dates, modes of payment, late fees, and more, and communicate them upfront to clients in contracts or proposals. This ensures customers can pay on time through the available channels for easy processing.
Aside from clear payment terms, using a standard invoicing template will help make your billing process more uniform and consistent for easy management. An invoice template that includes vital details such as invoice number, due date, description of services rendered or products delivered, and company contact information and logos can streamline billing and prevent customer confusion and miscommunication.
Forbes notes that around 61% of all late payments are due to incorrect invoices, so having this information standardized and applied to all of your invoices can help prevent hitches when billing customers. Clarity and transparency can keep your billing process accurate and efficient, so your startup can get a smooth revenue stream.
2) Account for unbilled AR
Your accounting system, billing cycle, or the type of services your startup offers can impact your financial statements and revenue recognition. You may end up with unbilled accounts receivable (AR). Revenue management solutions provider Softrax defines unbilled AR as revenue that has been recognized but not yet billed to the customer. It represents the value of goods or services that have been provided to the customer but have not yet been invoiced, and as such, have not yet been recorded as revenue on the company’s financial statements.
This can occur for various reasons, such as if the company does accrual accounting (as opposed to cash), which recognizes revenue when it is earned and not necessarily when payment is received, or when handling subscription-based services or large projects with multiple milestones.
Accounting for unbilled AR is crucial for managing startup revenue and maintaining and evaluating overall financial health. You can do so by creating a systematic process for recognizing when unbilled revenue occurs and adding an “unbilled receivables account” to your balance sheet to track this revenue.
Make it easier to ensure unbilled revenue is converted to billed revenue in a timely and efficient manner by setting a structured billing and invoicing process and a billing schedule aligned with your revenue recognition practices. Set consistent days to do this each week in your journal entries and ledger in your calendar so it’s not forgotten.
3) Communicating with vendors
Before you start working with vendors, set expectations by communicating with them, outlining your payment terms, and how the terms can fit into your payment cycle. Discuss how your startup pays its bills and any specific details about your company’s payment terms. Make sure vendors agree to your payment conditions in writing and clarify all information to avoid miscommunications or issues in the billing and payment process.
Staying on top of payments to vendors is also an essential part of invoice management and can also help you maintain good financial health and strong business relationships. It can be difficult to manage invoices from various vendors, so using software can help make the process easier. Accounts payable solutions like Digits AI Bill Pay can streamline payments, process bills, and extract all the relevant vendor and payment information so they can be easily approved and paid.
Conclusion
In conclusion, effective billing management is essential for your startup’s financial health and business relationships. Standardizing and clarifying invoices and payment terms ensure transparency and build trust with clients. Accounting for unbilled accounts receivable helps maintain an accurate financial picture, preventing revenue issues. Clear communication with vendors and using modern accounts payable solutions will streamline operations and reduce errors. By implementing these tips, you can avoid financial pitfalls and lay a solid foundation for long-term success.
