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Determining Your Invoice Payment Terms

Posted by Dave Clarke on July 10, 2014 at 2:42 PM

Net 30. Net 15. Due upon receipt. Net 60.

Just about every invoice ever generated has a term like that, specifying when payment of said invoice is due. But for most small business owners just starting out, determining their company's payment terms isn't a black and white decision. What's too long? What's too short? How will the customers or clients react?

So let's add some guidance and cover some of the factors that small business owners should consider when it comes to setting their invoice payment terms...

Consider Cash Flow

Every small business has expenses. Rent, utilities, materials, equipment, payroll, partner vendors... the list literally can go on forever. These obligations, or liabilities, rely upon cash inflow. So when you're invoicing your customers or clients, you need to consider the outflow. What are the terms of your bills? Can you prioritize them by due date? The point is, the gears that make your business go rely on cash inflow. And that's a factor that needs to go into your invoice payment terms decision. You need to make sure the money's there when it comes time to pay bills. So if your bills are due monthly, perhaps your invoice payment terms should be 30 days—or maybe even 15.

Avoid "The Day"

One of the last things you want is for all of your income to come pouring in on the same day that bills are getting paid. Not only does it create anxiety that your account could swing into the red—even for just a few minutes—but it also is going to get confusing. So if possible, set your invoice payment terms so they stagger the time period when your bills are due. You'll have less anxiety and you're less likely to incur any overdraft fee your bank might slap you with should that aforementioned "swing into the red" happens. (Note: "The Day" is of particular concern for small business owners just starting out. Hopefully, in time, you'll build up a reserve and "The Day" won't really be much of an issue.)

What's Your Industry Standard?

The payment terms are going to be different for, say, an exterminator and a tech consultant. For the exterminator, who's able to tap out an invoice on his iPad (*hint hint*) after treating a house, payment due upon receipt is entirely acceptable—especially if they take checks or use a service like Square. Conversely, the tech consultant might do a months worth of work for a client from perhaps a remote location and then send an invoice. Net 30 might be totally appropriate. The point is, get a sense for what others in your industry do. If you skew too far from that in either direction, it might ruffle some customer feathers. And speaking of customers...

Align Customer Expectations

The best way to avoid invoice payment term conflicts or surprises is to make them clear right up front. When signing on a new client, have the terms codified in your agreement. Not only will that keep both of you aligned, but it will also give you a legal leg to stand on should things not go swimmingly.

Be Fair

If your terms are, say, 30 days and a client doesn't pay within that timeframe, evaluate it on a case basis. Are they a new client? Because if so, grilling them the day after payment was due might not help the long-term relationship. If it becomes a trend though, that's a different story—a story that likely ends with you not working for them. Again, this is where codifying a process in your agreement can help. Spell out what happens if a payment is late, when the customer will be notified, and when work will cease if payment is still not received.

Consider Incentives

While it may not be right for all businesses, providing a customer or client a discount should they pay their invoice early can be a great motivator—and it fills your bank account sooner! Be careful with this idea though as it ultimately eats into your bottom line.You have to ask yourself: what's more valuable? Full payment later or a slightly-less-than-full payment now?

 

At the end of the day, the invoice payment terms you set will depend on a number of things—and it might even be different from customer to customer. Hopefully these thoughts helped and you've got a good idea of what to do. But one thing's for sure, go do some work and generate an invoice!

 

 

 

Topics: Small Biz Tips