Improve Your Invoice Payment Terms and Turbocharge Your Cash Flow

Invoice payment terms

Over 40% of all invoices are paid late. Think about that. Forty percent of money that should be at your disposal is sitting in the bank account of businesses you’ve completed jobs for.

Now let’s be clear, some businesses are really good at being paid on time, but that means others get paid late far more often. We surveyed business owners in over 40 industries to get insight into what they’re doing well and what they know they can do better to get paid quicker.

The one common thread? Focus on your invoice payment terms, and your cash flow will improve overnight.

Why focus on payment terms?

Quite simply, clearly communicated and understood payment terms put you back in control:

  • Get paid quicker by specifying when your customers pay you
  • Maximise your profit by specifying how you get paid
  • Ensure clarity by including payment terms in your contracts; and
  • Enjoy predictable cash flow with predictable payments

What are payment terms?

Invoice payment terms clearly articulate the conditions under which you will complete a sale, and everything your client needs to know about paying you. They should include:

  • When you expect to be paid
  • How you can be paid
  • Any conditions on the payment
  • Discounts and late payment penalties

Whether you’re selling widgets B2B or luxury goods direct to the consumer, you should always ensure these standard payment terms are included on your invoice.

Common Invoice Payment Terms

Invoice
Payment
Term
Term Definition
PIAPayment In Advance
Net 7Payment due seven days after invoice date
Net 10Payment due 10 days after invoice date
Net 30Payment due 30 days after invoice date
Net 60Payment due 60 days after invoice date
Net 90Payment due 90 days after invoice date
EOMEnd Of Month
21 MFI21st of the month following invoice date
1% 10 Net 301% discount if payment received within ten days otherwise payment 30 days after invoice date
CODCash On Delivery
Cash
account
Account conducted on a cash basis, no credit
Letter of
credit
A documentary credit confirmed by a bank, often used for export
Bill of
exchange
A promise to pay at a later date, usually supported by a bank
CNDCash Next Delivery
CBSCash Before Shipment
CIACash In Advance
CWOCash With Order
1MDMonthly credit payment of a full month’s supply
2MDMonthly credit payment of a full month’s supply plus an extra calendar month
ContraPayment from the customer offset against the value of supplies purchased from the customer
Stage
payment
Payment of agreed amounts at stage

How payment terms are determined?

Ultimately, you are in control of determining your business’ payment terms. However in reality, like all good business practices, there may be some negotiation to arrive at the right payment terms for both you and your client.

In many parts of the world, standard payment terms have traditionally been 30 days from the date an invoice is issued. However these terms have shortened considerably in recent years with up to 75% of businesses in some industries specifying 14 day terms.

Payment terms can of course vary by industry, and it’s not uncommon for businesses to impose cash on delivery (COD) or due upon receipt terms on new clients until they have established good payment practices.

More established clients may request longer payment terms of 60 or even 90 days. When considering these requests it’s important to consider the impact such terms will have on your cash flow. Are the sums significant? Will you need to cover costs of sale associated with the invoice before you are paid?

One general rule of thumb is that the more generous you are in determining the standard payment terms, the less likely your customers will be to try and negotiate. On the flip side, if you set short payment terms, you will need to be more willing – and have more time to – negotiate payment terms on a regular basis.

What payment terms can include

So you’ve got the basics covered. You’ve considered your cash flow and you’ve told your client when they will need to pay your invoice.

What else should you include on your invoice payment terms?

A often overlooked inclusion in your payments terms should be how you want to be paid. When thinking about this, you’ll need to weigh up the cost between how much convenience you want to give your clients, and how much time or money you’re willing to spend to get paid.

Accepting credit card and debit card payments is convenient for your customers, and can increase the speed with which you are paid, but you’ll always pay a processing fee. It may only be 2-3% of the sale, but on large ticket items, you may be foregoing hundreds if not thousands of dollars.

Alternatively you can incentivise your clients to pay promptly – and improve your cash flow – by offering early payment discounts or charging late payment penalties. Offering early payment discounts can also work on a more subtle level if early payment discounts are not commonly offered in your industry by increasing loyalty amongst your customers.

But keep in mind, discounts always come out of your profit. If you’re going to regularly offer discounts for early payment, you may need to revisit your pricing structure to ensure you maintain the profitability of your business. Customers love discounts but the bottom line of your business should not suffer for the sake of better cash flow.

For example: Stephanie has just completed a job for a client of her design business. She received a 50% deposit before starting the job, but to encourage quick payment on the balance invoice she is about to send, she offers the client 5% discount if they pay within seven days of the invoice date. As this is only a bonus option for the client, Stephanie still needs to ensure that the standard 28 days terms of payment are included. For this, she includes the payment terms ‘5/7 net 28 Days’ on her invoice.

Specifying payment terms

As you can see, the payment terms you use can have a significant impact on how quickly you get paid, and ultimately how much time you need to spend chasing unpaid invoices. But the best made plans are of no value unless you clearly communicate them to your customers.

Your invoice payment terms need to be clearly specified on your invoices and, where relevant, should be included in your estimates or client contracts. Remember, it’s always better to over-specify rather than leave things up to chance. If you have very specific payment terms or particularly stringent consequences for late payments, make these clear from the start. You will not only minimise any confusion, but will improve the relationship you have with your client.

Consistency is key when specifying your payment terms. People are creatures of habit and we love familiarity. If your payment terms are always consistent, your client will become familiar with when they always need to pay you. And when it comes to specifying your terms – whatever they happen to be – make sure you use standard terms and always double check you have not made any errors.

Where to include payment terms on invoice

We sometimes take good design for granted, and when it comes to creating invoices many of us might not think that layout is very important. But put yourself in the shoes of your client. They may receive hundreds of supplier invoices every month. The invoices that are well designed – and have their payment terms clearly visible – will always be processed faster. Include your payment terms clearly on your invoices. Give them space and, to maintain professionalism, don’t let them interfere with other important information.

For example: If you are expecting EFT payment for your invoice, include any additional payment terms next to your bank details to ensure they are noticed. If you accept credit card payments via a ‘pay now’ button on an electronic invoice, include your payment terms near the button.

Pro tip: If you’ve recently updated your bank account or other details, make this standout by using a bold font or a different colour to ensure you are paid correctly.

How to improve your invoice payment terms

Firstly, talk to your clients. Research shows that in over 65% of instances where standard payment terms are clearly understood upfront, payment is received on or before the due date. It also sets the tone for clear ongoing communication between yourself and your client, and helps builds mutual respect.

Think about what is best for your business. Do you need better cash flow? Will You need to pay your suppliers before your clients pay you? Whatever standard payment terms you determine are best, make sure they are well considered and help your business to grow.

Think about what will motivate your clients to improve their payment behaviour with you. Will early payment discounts make them pay you quicker and be more loyal? If their cash flow is tight, will they be more likely to prioritise paying your 14 day net invoice ahead of other 30 day net invoices? Is giving up a few percent of each sale to allow your customers to pay with a credit card a fair trade?

When it comes time to invoice, communicate clearly. The easier you make your invoices for your customers to understand, the earlier they will pay you, the better your cash flow will be, and the less time you will have to spend chasing outstanding payment.

Invoice Payment Terms Template

Not sure exactly how this should look on your invoice?

Here’s an invoice payment terms template you can adapt and use in your own invoices.

Due Date: 22 Sep 2020
Terms: 5/7 Net 30 days
PLEASE NOTE OUR NEW BANK DETAILS
A/C No. 051620110000135 DBS Chicago. SWIFT CODE : DBSCHIEPF
Late payments will incur a late fee of 15% annually, calculated daily

Key takeaway

If you’re one of the 40% of businesses who gets paid late everytime you complete a sale there is a simple solution. Review and improve your invoice payment terms to start seeing improvement in your cash flow.

Put yourself in control of your business and ensure you get paid quicker by specifying when and how your customers pay you. Incentivise your clients with early payment discounts or late fees. And always communicate clearly and transparently. Not only will you improve your cash flow now, you’ll deepen the respect and trust you have with customers who will be loyal to you for years to come.

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