Owning your own business provides a rewarding experience. As your own boss, you can set your hours and your priorities. You are also free to pursue the work that you find rewarding and fulfilling.
But no matter how much you love what you do, collecting your pay remains a necessity. After all, if you don’t get paid, you can’t stay in the business you love. In today’s economy, managing your business and personal expenses has become challenging for most business owners. The cost of doing business and the cost of living have both reached historically high levels. Because of this, getting paid on time must be a priority for any business owner.
With that in mind, it’s important to know that your invoice terms are the most crucial aspect of cash flow management. The terms you set determine when you get paid, how you get paid, and what happens when you don’t get paid. This sets the expectations, which, in most cases, customers meet. When they don’t, having set the proper invoice terms makes dealing with the problem a straightforward process.
It’s all about setting expectations
Have you ever had to make uncomfortable collection calls? For most business owners, this chore rates up there with cleaning the bathroom. It has to be done, but don’t you want to make the process as efficient and painless as possible?
To achieve this, make sure your invoice terms accomplish these three goals:
- Gives clear terms of how and when payments must be made
- Provides incentives for early payments
- Imposes late payment penalties
When terms spell out these three points, payments are generally made on time. When they are not, you have a clear plan of action on how to handle the situation. Additionally, following this method makes it easy to forecast revenue. With an accurate forecast, managing expenses becomes much less of a headache.
Common invoice terms
Upfront payments. When a short- or long-term project requires an initial outlay, such as for materials, asking for upfront payments is common and often necessary. Having to purchase supplies and then wait for payment can place a huge burden on a small business. This is especially true for contractors.
Whether an upfront fee is required or waived, there are several common invoice terms, which each have their pros and cons.
Payable on Receipt. Under these terms, payment must be remitted as soon as the project is completed. Payable on receipt terms provide the advantages of preventing customer payment delays and making cash flow smoother. Because the seller can always reclaim goods if the terms are unmet, customers are highly motivated to pay. The principle disadvantage of payable on receipt occurs in businesses with a lot of competition. Rivals may attract customers with more flexible terms.
Net 30, 60, or 90. These terms offer customers up to 30, 60, or 90 days after invoice receipt to make full payment. Net 30s are not uncommon, but Net 60s and Net 90s are considered very extended terms. These longer terms are often used to attract new customers. Larger companies are more likely to offer these terms, since they are better able to absorb a delay in cash flow. Providing these longer terms can help land large customers, who are accustomed to receiving these terms.
Many customers pay invoices late on a routine basis. This can mean that, to them, Net 30 means Net 45, and Net 90 might mean Net 120. The terms are already long enough to cause cash flow issues. Customers who delay payments can make this even more painful.
Early pay incentives. Many small business owners avoid cash flow issues by offering an early payment discount. This allows them to offer competitive terms, while also encouraging early payments. These incentives are expressed by showing the discount, the discount period, and the regular terms. For example, 2/10, Net 30 indicates a 2- percent discount if payment is made within 10 days, and the regular payment term is Net 30.
In addition to providing clear payment terms on the invoice, it’s also crucial to discuss terms with clients up front. Setting expectations is one of the most effective methods of avoiding late payments. This discussion also provides an opportunity to negotiate terms.
Managing invoices can consume many hours each month. For small business owners, those hours could be better used prospecting for new business and completing projects. An effective invoicing system provides the ability to automate many invoice management tasks. Invoice terms can be generated by the system and invoice statuses tracked. Reports can show invoice activity and be used in cash flow projections. When an invoice is late, an automatic notification lets you know that action is needed.
Understanding invoice terms and creating clear payment terms takes all the pain out of invoicing and reduces cash flow problems. With invoicing under control, you are free to focus on your core business. A good invoicing system takes away worries about getting paid.