As a small business owner, do you struggle to collect customer payments on time? If so, you may want to include payment terms with your sales.
Payment terms are guidelines you set for customers. The terms tell your customers how, when, and what to pay you. If a customer does not pay you the total amount by the scheduled date, you can choose to charge interest.
Usually, you outline your payment terms in an invoice to avoid collection problems. You should let your customers know about the terms before you send invoices. Also, include terms in the invoices.
No matter your business’s size, payment terms are a good idea for every sale. Payment terms prevent misunderstandings between you and your customers. They also offer an explanation for the amounts you charge.
Terms of payment help you get paid faster. They give customers a due date to pay you by. Without a deadline, customers might delay or forget to make payments.
Slow-paying customers can make it difficult to project your cash flow. Cash flow is the amount of money coming in and out of your business. You may make steady sales, but your cash flow will weaken as customer payments lag. When your cash flow slows to a crawl, so does your business. A negative operating cash flow isn’t sustainable, so how can you shape up your finances?
Payment term tips to improve cash flow
Are you using efficient payment terms to collect money? Try these five tips for managing small business cash flow with terms of payment:
1. Use clear communication
Before you begin work or deliver products to a customer, discuss your payment terms. Define your payment expectations, and what customers can trust you to do, to reduce communication issues.
Be clear and polite with your customers. Whether a payment is negotiated or standard, make sure the terms are agreed upon before moving forward.
2. Put payment terms in writing
It’s essential to write down your payment terms. Doing this shows proof of your agreement with the customer. The customer also has a physical reminder of the payment information.
Make sure you get all the details of the sale when you write down your terms. This could include the customer’s information, the scope of the work, and the purchase order number. Define when you expect to be paid and where customers should send payments.
3. Shorten the net days
Net days means the customer must pay the total invoice amount within a certain number of days after you send the invoice. Most industries have a standard amount of net days for payment terms (e.g., net 30). But, you may want to use a shorter time span for your business.
When you reduce the number of net days, you often receive the payment faster. The faster you receive payments, the stronger your cash flow is.
Keep in mind that not all customers will pay on time. With a net 30, a late payment could stretch on for nearly two months before you’re fully paid. If a customer is late with a short deadline (e.g., net 15), you still might receive the payment within a month’s time.
4. Define the number of days to pay
When you set a deadline, use the number of days you expect to be paid by, not a distinct due date. For example, instead of saying you want to be paid by April fourth, say you want to be paid within 15 business days.
When you name a specific pay date, it’s easier to mark the day on the calendar and forget it. Instead of paying by the date, customers are more likely to pay on the date. While customers may pay on time, they are less likely to pay early. An on-time payment is great, but an early payment is better.
5. Use an early discount incentive
Positive incentives, such as discounts, may motivate customers to pay faster. Giving the customer a percent off the total bill can speed up your cash flow.
For example, you could offer 2% off the total for a payment received within 10 days of invoicing. Discounting a small percentage off can encourage customers without costing you a lot of revenue.
Changing your strategies
These five tips for payment terms could improve your cash flow. If you change your payment terms, notify your customers before sending them invoices.
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