There are very few variables that business owners have control over. What business owners, consultants, and self-employed professionals can control is how often and how they get paid. These two factors can help organizations of all sizes run with fewer hiccups and and lack of financial barriers to growth.
Invoice payment terms outline how, when, and by what method a customer remits payment to a seller. Components include:
- The period of time that the buyer has to pay the amount due
- Stipulations for an advance or deposit
- Payment plan details
- A list of accepted payment methods
Your invoice payment terms are like railroad tracks. You create a schedule for when your organization gets paid. This system should benefit your company at a strategic level, to run sustainability and maintain a strong financial picture. This guide will equip you with the skills you need to achieve that goal.
The Importance of Defining Terms
One of the early lessons that business owners and independent consultants learn is that setting invoice payment terms is an art. Some entrepreneurs go through their entire careers with this perspective—not everyone has a formal business education or even self-identifies as an entrepreneur. Regardless, a business owner may not realize that he or she has an “invoice payment terms” problem until a business downturn happens. All of a sudden, an organization runs out of cash, can’t make payroll, pay taxes on time or cover basic expenses. And then what?
Well-run organizations—whether it’s a company of one or a company of twenty— should have predictability over its cash flow, tax planning, and position. Knowing what’s going to hit your account, how, and when, is essential to cash flow predictability.
Cash flow predictability is what enables a self-funded organization, consultant, independent contractor, etc. to run sustainably. Control over your cash gives you room to expand and forethought to scale back. Let’s say that you get sick. What happens next? Strong cash flow management is what makes companies resilient. If you’re an independent contractor, you’ll want to do this diligence.
Control Payment Timing
It’s important to choose payment terms that maximize how quickly you’ll get paid while also minimizing convenience for your customer. Let’s say that you run a professional or personal services business. You may want your customers to pay you immediately. Or, you might bill at the end of the month: you retain your customer’s credit card information using an easy-to-use mobile payments processor. Maybe it makes the most sense to charge a subscription or recurring fee.
Here are some options for you to explore:
- Prepayment. You can require that your customers prepay you or your organization for a services. If you have a wedding photography business, for instance, you do not want to run the risk of a cancellation. So you may want your customers to put down an upfront payment. If you operate a coaching business, you might offer discounts to customers who prepay sessions in advance.
- 50% Upfront. Every business has operating costs to support. If a customer is unable or unwilling to pay upfront, one option is to compromise with a 50% deposit. Both organizations take on an equal risk.
- Immediate payment. Immediate payment refers to a transaction for which payment is due at the time when products are delivered. You may recognize this terminology within contracts through phrases like “Cash on Delivery” (COD) or “Payable on Receipt.” Should the buyer fail to make a payment at this time, the seller is legally able to repossess his or her goods. If your company offers a service, you can cease to provide that it.
- Net 10, 15, 30, 60, or 90. These terms refer to the number of days in which a payment is due. One of the most common payment terms, Net 30 days (or “N/30″), means that a buyer must settle his or her account within 30 days of the date listed on the invoice. It’s important to remember that 30 days is not equivalent to one month. If your invoice is dated March 9, clients are responsible for submitting payment on or before the 8th of April. Businesses may also set invoice terms to Net 60 or even Net 90, depending on their preferences and needs. Large, enterprise customers will often need a full 60 or 90 days to pay. In situations with long payment cycles, small business owners can ask for a deposit or 50% upfront. They can also apply for invoice factoring lines.
- Lines of credit. Line-of-credit payment terms offer buyers credit toward the products and services they purchase. More popular among large companies, this type of payment term presents each buyer with a monthly invoice, which is then paid via check or bank transfer.
- Installment agreements. Similar to line-of-credit payment terms structurally, installment agreements are cash based. Companies split up big projects into milestones over longer time spans.
- Subscriptions and retainers. With these terms, customers pay on an ongoing basis—commonly weekly or monthly. The structure of this model will depend on the unique product or service that you offer.
- Late payments. Also known as “delinquent payments,” you have the right as a business owner to charge late or penalty fees to a delayed invoice. You can think of these stipulations as bowling alley bumpers that encourage your customers to take on-time payment seriously.
Automate payment reminders using QuickBooks Payments
If your customers pay using Net-30 or Net-60 terms, you may find yourself lacking the funds you need to maintain your operating costs. The timing of your payments may impact your ability to reinvest in the growth or evolution of your organization.
Whether or not you’re struggling to manage cash flow for your business, it is important that your financial picture matches your business goals. Are you timing the collection of your invoices with the right precision?
“Just one change to your invoicing approach can change a business’s overall health,” says Zvi Jarmon, CEO at business plan writing company Joorney. “If you collect payment upfront for 90 days worth of services, you all of a sudden have funds to pay suppliers or finance your next inventory round.”
Control Payment Methods
In addition to controlling the timing of your payment, you decide how to get paid.
“Many entrepreneurs become so enthusiastic about making that sale that they forget about the cash flow factor,” says Kimberly Kelly, founder and CEO at Katy QuickBooks Advisors. “Or they allow customers to determine when they pay their invoice. Ask yourself, do you go to the hair salon or the barber shop and then expect to pay them when you can? Likely not.”
“Remember, this is your business, you define your policies on payment which include invoicing terms.”
The simplest way to define your payment policies is to make the process as convenient as possible for the customer. You may be accustomed to receiving paper checks or cash. One way to streamline how you get paid is to use software that moves your payments process online.
- Smart Invoices. This is a feature within QuickBooks accounting software that enables customers to pay business anytime, 24/7. Business owners can set up free Automated Clearing House (ACH) bank transfers with immediate deposits. You can also collect credit card payments, but keep in mind processors charge transaction fees. You’ll pay a monthly fee for this online service, but the tradeoff is that you’ll have more predictability over the financial health of your work. One way to offset credit card transaction or monthly fees is to raise your company’s rates, if that is a possibility.
- Mobile Payments. You can accept credit card payments from your mobile device as well. QuickBooks comes with hardware that makes it easy for business owners to accept payment, in-person. If your company does business with customers on-site, for instance if your company offers catering services, you can accept payment on the spot.
“Make invoices as painless as possible for the customer,” says Kelly. “For example, you could use an ACH form that states you will invoice the customer weekly, biweekly, or monthly via auto pay. Implement a contract and make sure the payment process is clear to the customer.
QuickBooks online offers a free email and ACH payment merchant service account. The invoices are directly emailed to the customer with a link for payment. There is a small percentage fee for credit cards. Automation then takes care of the rest. If those options don’t work for your type of business consider offering a discount or rebate for early payments. Sometime an incentive make all the difference.”
Get paid 2x faster by accepting payments in QuickBooks.
It is important that you negotiate your payment terms with your customer, upfront. Work together to figure out what will be the right approach for both sides. Once you come to a consensus, outline these terms in your contract and/or scope of work.
This documentation gives you legal standing in case your customer does not pay in a timely manner. If necessary, you may need to send your customer to a collections agency.
You can think of your company’s cash flow as the underlying financial infrastructure for your operations. Once you define your terms and establish a rapport and level with your customer, automate the rest with pre-programmed reminders. The less you focus on hounding down payments, the more you can focus on your core business strategy.