Keeping customers happy should be the number one priority for all small business owners. However, it is equally important to know when to draw boundaries—particularly when it comes to invoicing payment terms. While there is no one-size-fits-all solution for creating payment terms, there are several best practices that business owners can follow to ensure on-time payment without jeopardizing their customer relationships. Related: 5 Mistakes Your Making When It Comes To Getting Paid How Slow Payments Impact Your Small Business Before we dive into these best practices, it’s important to know just how much slow payments are affecting small business owners. A few late invoices can seem minor at first but can lead to huge negative impacts on your business. According to a Fundbox survey, unpaid invoices cause a plethora of consequences for businesses. These include: The Inability to Hire 25% of small business owners across the US chose not to hire new employees to allocate efforts on receiving late payments. Pay Cuts for Business Owners 79% of business owners cut paying themselves because there is no late fee for paying themselves late, as compared to other business expenses like supplies, rent, and utilities, for example. No New Equipment to Scale 23% of business owners can’t afford new equipment due to a lack of capital. This directly affects their ability to work with bigger customers or move into new markets. Saying Bye to Marketing 20% of small business owners cut their marketing and growth efforts due to slow or unpaid invoices. Define Invoice Payment Terms: How to Improve Your Cash Flow Before you start making decisions about your payment terms, there are a few considerations you should pay attention to. What is your cash flow like? When are your bills due? What is the industry standard? What are your customer’s expectations? Are there incentives for certain payment terms? Are you being fair? To read more about these considerations in detail check out this article. Although these previous numbers are a shocking reality, your business doesn’t have to get to this point. Before we say farewell to marketing and growth costs or losing out on paying yourself, there are a few best practices that you can implement rightaway to speed up payments. The following are a few easy-to-implement tactics to encourage quicker payments. Related: Easy Invoicing Strategies (And Accounting Tools) to Get Paid Quicker and Easier Spell out Invoice Payment Terms Right Away Being open, honest, and transparent with customers involves taking the time to spell out exactly how much time the recipient has to provide payment for the invoice they’ve received. These terms are often stated on a contract. Payments due upon receipt mean right away whereas invoices that list net-30 mean that the recipient is expected to submit payment within 30 days. Spelling these terms out and having it in writing provides a paper trail that you can refer back to when payments are going south (i.e. consistently late). Timing Is Everything To get paid on time, you need to define what “on time” really means. Payment expectations can fall anywhere between right away and 90 days, although a 30-day window is a good standard. Both industry standards and customer expectations can determine what your payment timeframe will look like. For instance, if you set payment terms that are considered tight by industry standards, your customers might not be too happy. However, if your payment terms are far too generous it could cause significant cash flow risk to your business. Finally, it’s important to be clear about what on-time payment is for you and your business, and to ensure that your client is on the same page about the timeframe. Setting these expectations (and doing it accurately) largely depends on your internal revenue cycles. For example, if most of your company overhead is billed monthly, then setting 30-day invoice payment terms—or even 15 days—can help ensure you have enough cash to cover your costs. In the same vein, if the majority of your biggest business expenses like your rent is billed on a 90-day cycle, then you can afford to give your customers 60 days to submit payments. Pinpointing the right timing for your payments involves finding the right balance between a comfortable payment period for your customers and not putting your business at risk. Incentivize and Penalize Know when to draw the line if clients are consistently paying late—or defying existing terms. Consider applying interest to late invoices, especially if your business’s cash flow needs it. Another option is to positively reinforce the importance of quick invoice payments. Incentivize your terms by offering discounts to those clients who pay within a set time limit. For example, provide a reduction of 5% if they pay the invoice within five business days of issue. Defining payment terms help you consistently create a steady stream of income to operate your business. If you’re looking to level up your invoicing, try Kashoo’s accounting software to see how you can get paid quicker and easier.
