The Best Payment Terms for Faster Cash Flow

invoiceA great way to speed up your cash flow is to get paid faster by customers who owe you money. One way to do that is to examine your payment terms to see if you can accelerate them. First let’s talk about what payment terms are common. Then I’ll share a study that showed which payment terms generate the fastest payments.

English, Please

Traditional payment terms are spoken in the following format:

Percentage discount/(Days due from invoice date), “Net” (Days due before payment is past due)

An example is 2/10, Net 30. It means to the customer that if they pay within ten days, they can take two percent off of the invoice due amount. If they don’t want to do that, they need to pay the full invoice within 30 days of the invoice date.

You could write “2/10, Net 30” on your invoice, but you will get paid faster if you write it out in plain English.

Industry Standard

If your industry “has always done it that way,” I encourage you to challenge the status quo. Getting your cash faster is important to all small businesses, so don’t let your industry hold you back.

Discounts

Most corporations are required to take discounts if they are offered, so offering an early pay discount might help you get paid faster.

Insights

There are several studies on how to get paid the fastest. Of course they all have different conclusions! FreshBooks advises that “due upon receipt” terms can work against you as most people decide that that can mean anything. They suggest using wording that says “Please pay this invoice within 21 days of receiving it.” Here is their blog post on the topic:

http://www.freshbooks.com/blog/the-best-invoice-payment-terms-to-help-you-get-paid-faster-and-more-often

Xero produced a page on the topic as well. Their research suggests that debtors pay bills 2 weeks late on average. They also suggest using terms of net 13 or less in order to get paid within 30 days. Here is their page on the topic:

https://www.xero.com/us/small-business-guides/invoicing/invoice-payment-terms/

Feel free to contact us if you’d like help deciding on payment terms for your business.

Does Your Accounting Department Have Holes in It?

holes-leakYou’ve got someone to do your federal and state income tax returns, and you have a bookkeeper. So that’s all that a small business needs when it comes to having an accounting department, right? 

Wrong. 

Large companies have many functions in their accounting departments, and small and mid-sized businesses need many of the same functions as well. They just won’t need as many staff to handle them. Many of these functions will fall on the CEO, but a smart CEO will find a way to delegate some of the accounting duties to free their time up.

Here are just a few of the things you’ll want to make sure that you have covered in your small business accounting department:

Accounting Software Expertise

Who do you have on your team that can identify opportunities for making your accounting function run more efficiently? The solutions could include training on your current system or could be more comprehensive such as identifying a new accounting system that will save a tremendous amount of time and money.

Let your accountant get to know your processes because they may know of some software applications that can do what you need faster, better, and cheaper. Manual data entry is a hot spot of potential; today, you can find software, scanners, and even smartphones and tablets that can automate the data entry, even if all you have is paperwork to enter.

Business Performance Advice

Are you getting accounting reports that tie to the areas where you have challenges and issues? If not, let your accountant know where those areas are. They may be able to suggest some reports that will provide you with insight and enlightenment.

If you are receiving reports with lots of numbers that you’re not quite sure how to interpret, ask your accountant for help. They can not only help you interpret the numbers, but they can also put the report into a graphical format so that it’s more visual for you.

It’s All About the Revenue

The number one challenge of most small businesses is to attract more business and generate more revenue. Your accountant can help you study your revenue patterns by presenting “what if” tools that can help you see what happens when you change price, impact mix, or adjust volume.

Keeping the Cash Flowing

If your business seems to stampede through cash, you’re not alone. A cash flow forecasting report is in order so you can plan ahead and be ready for the valleys and hills.

Beyond Compliance

If your accounting department focuses on compliance work alone, such as taxes and recordkeeping, you’ll miss out on allowing it to become a profit center of sorts. With these added functions, you’ll discover new actions to take in your business to drive profitability. You’ll have clarity about decisions like price changes, and you’ll know your accounting function is efficient and not wasting time and money.

Take a look at your accounting department, and let us know if we can help you plug any of the holes.