Are your credit terms stopping you chasing outstanding sales invoices? It may seem obvious to reiterate the importance of chasing outstanding sales invoices, but how many companies can say, hand on heart, that they do chase them religiously and how many businesses can claim that they get 100% of invoices settled within their normal credit terms?
Recent research has suggested that one quarter of invoices are not paid in line with agreed terms and over 15% of invoices were taking more than 60 days to be settled.
Setting credit terms which work for you and your clients is incredibly important but all too often this part of a contract or purchase order for goods and services is not discussed openly, leading to some nasty surprises down the line. Furthermore, the concept of flexing terms by client or by deal is rarely explored and yet if this were used as a negotiation tool more often, it would lead to better trading relationships and more accurate forecasting for most businesses.
When you set out in business, you normally document your own terms and conditions as part of the set-up process, but these should never be written in stone and like all Ts and Cs should be regularly reviewed to ensure they continue to reflect the nature of the business you are undertaking and the clients you are working with.
As the saying goes, ‘cash is king’ and so it is typical that the terms you want to set for your business reflect the wish to get as much through the door as possible and as quickly as possible. But this approach does not necessarily consider the fact that the people you trade with are also managing their cash flow and may have their own protocols around payment runs that mean you will be paid but will never be paid on time. So, as you grow, and your business develops it may be that flexing your terms will ensure more of your invoices are paid on time and you can spend less time chasing them.
Some key considerations when setting or reviewing your credit terms
- Do you invoice at the right point and promptly? If you have 15-day terms but do not invoice until the end of the month for a job/order completed on 16th of the month, you may as well offer 30-day terms
- What industry is your client/customer in? Is their cash position likely to be affected by seasons, incomes or trends? If they are always cash poor for 20 days of the month and then collect everything in the last 10, you will probably never get paid until the end of the month so why chase?
- Is it better to agree to be paid on 30 days for an individual client, knowing that they will always pay on this date or stick at 15 days and risk the relationship by battling over late invoices
- Know your client – Have you asked them about their payment terms? It’s a very British thing not to discuss money but it can affect the entire relationship so address the elephant in the room
- Be consistent – Whatever your terms, whether globally or individually agreed, follow them up consistently, month in, month out, in the same manner for every client