Outsourcing - Invoicing, Payment Terms and Credit Control

Effective financial management is the key to any successful business, especially when you are in the market of supplying services to clients rather than selling goods from a shop window.

Although it is better for IR35 compliance (should you be operating as a PSC) for the supplier to receive a lump sum upon completion of the services, small businesses, no matter how they operate, may struggle to survive without regular income. It is uncommon for the supplier to receive their fee before the services have actually begun; therefore it is important to ensure that when any fees are due, they are received in a timely and efficient manner.

In order to achieve this goal, invoices must be correct and on time, payment terms set at a realistic level and finally clients must be aware of payment dates and possible actions if they fail to comply.

Invoicing

It is a requirement of law, unless the client operates a Self-Billing system, for the supplier to send their client an invoice for the services that they provide. Generally this will happen on a weekly/fortnightly/monthly or per trip basis; however the frequency should always be agreed before contracts are signed.

Limited companies operating as a PSC, Umbrella or under the CIS Scheme will require the following information on the invoice:-

The full company name and number as it appears on the Certificate of Incorporation.
The registered address and jurisdiction i.e. Registered in Scotland or England and Wales.
Any trading name or postal address where legal documents can be delivered should this be different from the registered name and address.
The VAT number should the company be registered for VAT with HMRC.

Sole traders will require the following information on the invoice:-

Any business or trading-as (T/A) name if the sole traders' surname is not being used.
An address where any legal documents can be sent if a business name is being used.

Limited Liability Partnerships (LLP) will require the same information as a limited company, but must also include the words ‘Limited Liability Partnership’ or the abbreviation ‘LLP’.

The invoice will then require various pieces of information which the client can use to process it correctly. Below is a list of common requirements, however, this may differ from client to client:-

Name and address of client.
An identifying invoice number.
Any purchase order/contract number required by the client.
The date of supply to client plus a short description of the services provided.
The unit price and the relevant quantity making up the sub-total.
The rate of VAT per item.
The total value of the invoice which is the sub-total plus the VAT.
Payment details dependent on how funds should be transferred.

Once this is complete, the supplier will be required to submit their invoice to the client along with evidence that the services have actually been performed. Invoice deadlines and the type of evidence required, e.g. timesheets, report logs, delivery notes etc, should be agreed beforehand and written into the contract.

Payment Terms

Most businesses trading today will give some period of credit to their clients. The duration may depend on the frequency of invoices, or even whether the client is required to wait for funds from another entity further up the supply chain.

The most common periods of credit range from 7 to 30 days from receipt of invoice, the end of the month in which the invoice was raised, or even a set date per calendar month. It would be advisable to research potential clients with longer payment terms in order to ascertain the possible reasons and how they may affect payment to you.

In all cases it is important that this topic is discussed before the contract is signed as there is no obligation for the client to amend these terms if your business suddenly encounters cash flow problems.

Credit Control

Proactive but rational credit control will effectively minimise losses from bad debt or cash flow problems from slow paying clients; it will also ensure that relations with clients remain buoyant.

It is essential for any business that credit control techniques are learned and used correctly. The supplier should:-

Understand how to fix appropriate credit limits or periods for different clients based on factors such as their size, reputation and the level of funds due for payment.
Learn how to establish a system for collecting late payment which often may just be a polite phone call referring to agreed terms in the contract.
Be able to draft appropriate warning letters to send to slow payers; these are often addressed to the directors rather than payment departments manned by junior employees.
Know which legal steps can be taken to achieve settlement of overdue accounts which may include remedies available using the Late Payment of Commercial Debts (Interest) Act 1998, or the Courts.

In all situations it is important to be assertive but also level headed. The last thing you want to happen is for your business to fold due to a lax approach, or for your reputation to be tarnished due to an overly aggressive attitude.

Outsourcing - Invoicing, Payment Terms and Credit Control

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