Payment Terms: Why do they Matter?

In providing bookkeeping services to numerous companies, we here at Margo’s Bookkeeping understand how accounting needs vary by industry. The need for payment, however, remains consistent. When coordinating contracts with or selling products to other companies, the payment terms included dictate the parameters of your agreement. Mastering the art of devising strategic payment terms will ensure that your organization has a consistent cash flow, and that you do not become cash negative.

What are Payment Terms?

Beyond simple transactions in which the entire amount is paid in person, all sales should be guided by payment terms. Payment terms govern the method and timing of payments, and prevent any potential misunderstandings that your customers might have in the future. They also explain the reasoning behind the rates, and any complications that might be present.

Write With Care, Not Haste

It’s easy to think of payment terms as the fine print that no customers will read. This outlook, however, will not benefit you in the long run. Avoiding payment terms entirely, or writing unclear terms that fail to articulate any concrete boundaries is detrimental to you. Additionally, the practice of marking invoices as “paid” before they have been paid off will be extremely confusing as well.

Examples:

Generally, payment terms are fairly straightforward, primarily stipulating the amount of time that the customer has to pay back, and the method of payment. These are some common phrases found within payment terms:

• Net 30- The payment is due 30 days after the date of the invoice
• EOM- The payment is due at the end of the month
• CIA- Cash is required before the product can be received/work can be started

While these terms are the most basic, our New York bookkeeping services can help your business to devise specific strategic payment terms for your purposes.

Improve Cash Flow

Cash flow is simply the amount of cash that moves in and out of a business. When a business has a steady income stream, and this total is greater than its debts, they have a positive cash flow. When a company’s debts are greater than their income, there is a negative cash flow.

By including payment terms in each sale, you can ensure that your business maintains a consistent positive cash flow. Consistent, on-time payments will ensure that your business is not owed any outstanding fees, and that you can continue to make operation-enhancing investments. Without the proper payment terms, your customers might fail to remember (or intentionally delay) the payment schedule. Our bookkeeping services will help you to keep cash flow consistent.

Payment Terms Advice

1. Communicate clearly with customers- Discussing the payment terms with your customers before executing any work on their behalf is key to an understanding relationships. Even if your company does not permit any payment terms negotiation, be sure to clearly explain the payment terms.
2. Put it in writing- Verbally agreeing on payment terms is nice in theory, but unreliable in practice. Giving the customer a copy of the payment terms will allow them to remember what they’ve agreed to.
3. Require Frequent Payments- While one payment per month may seem logical, this style schedule might ultimately prevent consistent payments. The longer a payment period, the later customers are likely to pay you back. The more frequent you receive payments, the more likely you will have a positive cash flow.
4. Don’t Set a Date- Instead, dictate an amount of days that customers have to pay you back. When customers set a date, they will either delay payment until the day of or forget about it altogether. When you tell them that they have, say, 10 days to pay their bill, customers will be more inclined to pay earlier.
5. Incentivize Early Payments- A small discount can go a long way in convincing customers to pay on time (or early). If you can give even 3% off of the total price for an early payment, then customers will be more likely to pay for each bill. This percentage is a small price to pay for a nearly guaranteed positive cash flow.

Looking for more tips about receiving payment? Check out this 5 Invoicing Tips for Receiving Faster Payment.

We Can Help You Encourage On-Time Payment

As bookkeeping specialists, we understand how to create payment solutions. We are capable of writing payment terms tailored to your business, and fulfilling your company’s needs. Contact us for more information about how our payroll services can help your company to stay organized, and maintain a positive cash flow.

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