With the start of the new financial year, now is the time to set your business payment terms and improve your cashflow for the year ahead. Healthy cash flow is important for any business, but particularly for small business owners in those first few “make it or break it” years.
Business owners who set clear payment terms with their customers, invoice quickly, and follow up on late payment can avoid the dreaded cash flow crunch that can quickly put them out of business.
These simple guidelines for setting payment terms can help you get paid quickly and maintain a steady cash flow.
Decide on your terms
The purpose of your payment terms is to outline exactly how and when your customers must pay you.
Some business owners provide their potential customers with an outline of their fees and payment terms. Others just include those details in their work contracts and invoices.
However you decide to communicate your payment terms with customers, make sure they include:
- when payment is due
- accepted forms of payment (i.e. cash, credit card, Paypal or EFT)
- your preferred currency (if you serve international customers) and
- early payment discounts and/or late penalties
In the business world it’s customary to be paid within 30 days of invoicing. However, as a small business owner you can set the payment terms that suit you best. For example, you might require partial payment up front with the balance due upon completion of services. Depending on the industry standard and how promptly your customers pay, you might stipulate a shorter or longer payment deadline.
In this digital age where invoices are sent out quickly, it’s not uncommon for small business owners to set a 7 day deadline.
So set your terms and communicate them clearly to your customers and it will be more likely you’ll be paid on time.
When to invoice and when to follow up
It’s in your best interests to invoice immediately after completion of services. After all, the sooner you request payment, the sooner you’ll receive it.
Some small business owners offer an early payment discount as an incentive to pay early – e.g. for 30 day invoices a discount rate of 1.5-2% is common. Many customers will be happy with this as they’ll save a few dollars, while you get paid straight away.
Customers who routinely pay late may be motivated by a late payment penalty – usually in the 1-2% range.
Make it a policy to email a friendly reminder on the date payment is due. If payment is still late, follow up with a phone call the next day to find out when you can expect payment.
- Take advantage of cloud-based accounting software that can be accessed anywhere there’s an internet connection, including via your smart phone, to generate invoices.
- Make sure you have the correct payment details on your invoices to avoid payment delays.
- Be willing to negotiate with late payers; partial payment is better than not being paid at all.
Should you ever need to take legal action to deal with a late payer, having documented evidence showing that you clearly communicated your payment terms up front will be advantageous.
If you would like help to improve your business cashflow and processes, Contact us today for a free, no obligation meeting and see how we can assist you.