When the cash flow starts running short in your small business, it can be very stressful scrambling to find money to make ends meet. So how do you rectify this? How do you boost your cash flow and, in turn, ease your stress? The secret lies in your invoicing terms.
You see, your payment terms influence how quickly you do (or do not) get paid. Having the right payment terms established for your small business is vital to your business success. But what are the most common invoicing terms and what impact do these have on your cashflow? Let’s look at the most common ones with some simple examples:
Payment in advance
This refers to any invoice where payment is required BEFORE goods or services will be delivered. This is the most beneficial to your cashflow as you are reducing any risk of non-payment regardless of the product/service quality.
The example: You order a burger. The cashier expects payment before the burger is made. If you choose not to pay, no burger ingredients have been wasted and it has cost the burger business nothing.
Payment on receipt
This means payment is required IMMEDIATELY AFTER your client/customer has received and inspected the products. This ensures they can inspect the quality of their order before making payment. In terms of cash flow, this means outlaying the cost of the products and delivery BEFORE any money is received. While this is not the most beneficial to your cash flow, it is highly beneficial for your client/customer relationship.
The example: Let’s go with ordering a burger again. The waitress takes your order and asks you to take a seat while your burger is being made. After a small amount of time she brings your burger, you inspect it to make sure she has your order correct and to your standard BEFORE you pay. However, if they have forgotten something, then you can refuse payment until it is corrected.
Refers to a certain number of days before payment will be due AFTER receiving the service/goods. These are usually set in increments such as 14 days, 30 days, 90 days, etc. This invoicing term has the greatest impact on your cash flow as you must wait for the invoice to become due before cash comes back to you, even though you have already outlaid for the cost of the products and delivery. However, it is also the most beneficial for client relationships as it gives the client time to pay you. Some small businesses will encourage earlier payment on Net Days invoicing terms by offering a percentage discount if paid prior to the Net Days due (just like your rates/utility bills.)
The example: You order a burger and you are advised you have 30 days to pay your bill BUT if you pay it prior to 30 days you will get a 10% discount. Your burger is delivered. You inspect it. Eat it. Love it. But you do not have the cash to pay for it right now so you make payment at the end of the 30 days. The burger business now has a ‘hole’ in its cashflow until you make that payment.
So … which one is best?
Determining what payment terms are right for your small business will depend on the type of product/service being sold and the amount of cash flow you have. Small businesses working with very tight cash flow and smaller invoicing amounts will find it much less stressful to work with a Payment in Advance model. A small business that deals with larger-volume clients and has more cash flow in reserve, however, may find the client relationship more important than instant payment and will opt for a Net Days invoicing terms. Remember, selecting the right payment terms for your business will directly impact how quickly you get paid.
Take the time to explore what the right terms are for your business so you can ease your stress and boost your cash flow now. Talk to our team about what this might look like for your business.