How Software Companies Can Protect Their Cash Flow

Debt Collection For Software Companies

Software companies have until now worked in a very profitable industry. These are the companies that give all other industries the efficient tools they need to get their products made, served, and to the customer as quickly and as efficiently as possible. But when faced with these economic challenging times, software companies risk just as much as any other company and may find themselves just one step away from declaring bankruptcy themselves, all because invoices aren’t paid on time.


The role of these business support companies is to sell software solutions to businesses so they can offer improved end solutions to consumers. However, business partners may not always be able to make their monthly or yearly license payments because of a declining economy.


The Client


Customers will vary depending on the type of software sold. In general, these clients might be department stores, banks, restaurants, engineering firms, hospitals, businesses, manufacturers, restaurant chains or just about any type of business functioning in today’s market.


The Issue


The truth is this, partnering businesses are experiencing difficulties. Many of them are on the brink of failure, and that may mean their software license payments are falling behind. This causes these companies to become delinquent in paying their software licenses.


The Software Licencing Process


In most transactions between software companies and clients, there is an extension of credit for the yearly license. In exchange for a yearly price, a software company maintains and updates its software and offers the client needed support for the product. Every year, payment is due around the same time and the usual accounts receivable time period is about 30 days. However, most companies rely on floating debt and in the current situation, and they now find themselves faced with poor sales. Ultimately, this means they cannot obtain the needed funds to resolve their debt in the allotted time period.


The damage caused by late payments or even unpaid invoices in other business sectors can cause havoc on software companies, especially when they sell their software with only a marginal profit. So just one unpaid invoice may require the revenue from 5 or more sales to make up for the lost revenue.


What Is The Answer?


Regardless of the size of the software company, unpaid invoices are damaging and can cause business failure. The best thing you can do is create strategies so that overdue invoices don’t threaten your business. For some, this may seem dramatic, but unpaid invoices negatively affect your cash flow and could result in late payment for your own suppliers.

Follow Procedure


Don’t send threatening emails if you aren’t sure whether you have been paid or not. Make sure you actually sent an invoice and made the terms clear. Have you specified the amount due and did you send the invoice to the right department and person therein? It would be embarrassing to lose your cool, only to find out the problem was you. Follow up after the invoice is due. Again don’t get angry. Just a quick email to let them know you are checking in to see if they have forgotten.


Give a Discount or Charge a Penalty


Think about offering discounts for early payment. Customers may be encouraged to make payments ahead of the due date. You might offer a one to two percent discount on your invoice total. By the same token, add penalty fees for late payment. This motivates clients to pay you on time and helps cover the costs of your own financing penalties.


Hire a Collections Agency


After doing all of this do you still find yourself spending too much time handling past due invoices? You may need to hire a collections agency for those invoices that are past 90 days. Sure, this is playing hardball, but in some cases, there is just no help for it. When you have invoices over 90 days past due and you don’t believe they will be paid, you may not have any other option. This type of company makes a commission on accounts that are collected on.


Avoid Unpaid Invoices


Understandably, these are trying times and it may be impossible to avoid unpaid invoices altogether, but you can minimize your risk by researching potential clients before taking them on. Make sure to get a signed contract and keep detailed records.


Be sure to make the payment process convenient and work on making your client relationships strong. But the most important thing you can learn about invoicing is to know when to stop chasing the late payment and turn it over to someone else. It is not worth your time and energy to hunt down clients for a $100 invoice. In the end, you want to do your best to get your software licenses paid on time and minimize the amount of time your staff spends on collecting overdue balances.