Dozens of options exist regarding payment terms for billing your customers. While you want to collect payment as soon as possible, you must also be mindful of your customers, their ability to pay and establishing quality relationships for the future.
The most common payment invoice term is net days. This term stipulates that payment is due a specified number of days after the invoice date. For example, if the term is communicated as net 30, payment is due 30 days from the date of the invoice. If the invoice is created January 1, payment is due by January 30. The most common durations for this payment term are as short as a week to as long as three months.
End of Month
Invoices can be designated as due at the end of the month. Regardless of when the invoice is issued, payment must be made by the end of the month. This is typically only issued for invoices sent during the first portion of the month. In this situation, an invoice issued on January 5 and another invoice issued January 10 would both be due by January 31.
Month Following Invoice
Payment terms can be defined as a specified number of days into the following month. This is similar to having a due date at the end of the month, but it buys your customers a little more time and can be more consistent throughout all invoices. For example, the payment term can be applied to an invoice issued on January 5 as well as January 25; in both cases, the payment term can be defined as 21 MFI, or by the 21st day of February.
Cash on Order, Shipment or Delivery
Payment can also be specified based upon the occurrence of an activity. Upfront payment can be required upon an order being placed. In addition, cash on shipment or cash on delivery stipulate payment is made upon activity related to the transfer of title of the goods. Both payment terms are unrelated to the issuance of the invoice.
You can also incorporate a payment discount to give price reductions for early payment. Typically integrated with net-days terms, there are two periods specified in the term. For example, “1% 10, net 30” outlines the requirement that if the invoice is paid within 10 days, a 1 percent discount can be taken – and payment is due on the invoice within 30 days.
Selecting Payment Term
Cashflow will increase with more stringent payment terms. However, this may negatively impact customer satisfaction. Price discounts may encourage earlier payment, but you will receive lower cashflow. Therefore, the deciding factor of your payment terms is your cash balances. Ensure you have sufficient cash on hand and projected inflows before agreeing to longer payment terms. In addition, research your market and industry to adapt your terms. For example, longer projects tend to have more lax terms, while product sales can have shorter allowable payment terms.