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Handling accounts receivable well comes down to three habits: invoice the day the work is done, state the due date on the invoice, and chase anything unpaid within a week of that date. Each late day on a large invoice is money you’re lending to a customer for free, and a debt you never collect can only be deducted once you’ve written it off as bad.
What should an invoice say so it gets paid?
A good invoice leaves nothing to ask about. Put the invoice number, the date, what you supplied, the amount, the tax shown as its own line, the due date and how to pay. If you’re a GST/HST registrant, the CRA expects your records to describe goods and services in enough detail to tell whether tax applies, so a vague line like “services” is a poor habit.
Ontario makes the tax easy to check. On a $4,000 job, the GST/HST calculator shows $520 of HST at 13%, so the customer owes $4,520. If the total on your invoice doesn’t match that, fix it before it goes out. Other provinces have other rates, so set the right one.
What payment terms should you set?
Net 30, meaning the customer pays within 30 days, is common, but nothing in tax law sets it. Shorter terms suit small jobs, and a deposit up front suits new customers. Say it twice: once in the quote and once on the invoice. Take Jess, a self-employed electrician in Calgary. She asks for 30% down on any job over a couple of thousand dollars and puts “due in 14 days” in bold on the invoice. Her late payers dropped off within a year, and she didn’t change a single price.
How fast should you follow up?
Faster than feels polite. A short, friendly note the day after the due date works, because most late payers forgot rather than refused. Then a phone call at day seven, a firm written notice at day fourteen, and a decision at day thirty.
| Days past due | Action |
|---|---|
| 1 | Friendly reminder with the invoice attached |
| 7 | Phone call, ask for a payment date |
| 14 | Written notice, pause new work |
| 30 | Decide: payment plan, collections or write-off |
Those steps are a habit we suggest, not a rule from any government. Change the days to suit your industry. What matters is that the schedule is written down and that you apply it to big customers as well as small ones.
What do slow accounts receivable really cost you?
More than most owners think, once you borrow to cover the gap. Say $20,000 sits unpaid and you’re carrying it on a line of credit at an example rate of 8%. The line of credit calculator puts the interest at $133.33 a month. Your rate will differ, but the shape doesn’t change. Three slow customers can eat the profit on a small job.
A discount for early payment can be cheaper than waiting. Offer 2% off a $4,000 invoice paid early and the discount calculator shows a $3,920 price plus $509.60 of HST, or $4,429.60 in total, against $4,520 at full price. You give up $80 of revenue and gain the cash sooner. We didn’t confirm how GST/HST is treated on a prompt payment discount, so check that with the CRA before you put it in your terms.
To see what late fees or interest on an overdue account would add up to, the interest calculator works for a rough figure. Check what your contract says before you charge anything, since you can only collect what the customer agreed to.
When can you write off a debt?
The CRA lets you claim a bad debt when you’ve decided in the year that an account receivable can’t be collected and you already counted it as income. That second condition is where cash-basis businesses get confused. If you only record income when the money arrives, an unpaid invoice was never income, so there’s nothing to write off.
Don’t write off a debt because it’s annoying. Write it off after you’ve made real attempts, and keep the file: invoices, emails, notices. What happens to the GST/HST on a bad debt is a separate question. We couldn’t confirm from a CRA page how it’s treated, so ask before you adjust a return.
What should a reminder say?
Keep it short and calm. Name the invoice number, the amount, the date it was due and the ways to pay, then ask for a payment date. Skip the sarcasm and the capital letters. A reminder that sounds like one person writing to another gets answered faster than a threatening form letter, and it keeps the relationship intact for the next job.
What mistakes cause the most trouble?
Skipping credit checks on a new large customer comes first. Ask for references, or take a deposit on the first job. Next is invoicing in batches at month end, which delays every due date by weeks. Then comes the awkward one, which is not chasing because the client is a friend.
Track an ageing list every week. It’s each unpaid invoice, its amount and its days overdue. Use the percentage calculator to see what share of your sales is sitting overdue. If that share climbs above what you’re comfortable carrying, tighten your terms.
And keep the paper. The CRA’s default is six years from the end of the last tax year the records relate to.
The sources behind this page
The bad debt rule and the record keeping period come from the Canada Revenue Agency‘s guidance for businesses. The invoice, discount and interest figures come from the calculators on this site, and the 8% line of credit rate is an example, not a quote.
Frequently asked questions
When can I claim a bad debt?
When you've determined in the year that an account receivable is uncollectible and you had already included it in income.
How long should I keep invoices?
The CRA's default is six years from the end of the last tax year the records relate to.
Should I offer a discount for early payment?
It can beat waiting. A 2% discount on a $4,000 job costs $80 of revenue in the example here. Check the GST/HST treatment first.
What should an invoice show?
A number, date, description, amount, tax as a separate line, due date and payment details.
Can I charge interest on overdue invoices?
Only if your agreement with the customer says so. Write the rate and the start date into your terms.
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