So a big question I often get is, what are payment terms and what is the importance? Don’t businesses just pay the invoice by the due date? You would hope so, but unfortunately, this doesn’t always happen. So, let’s chat through this.
What is the meaning of payment terms?
Payment terms determine how customers can pay for your goods and services and when exactly you expect them to pay!
Why is it so important to set up terms from the very start?
We can all understand that getting paid on time for a business is extremely crucial. Not only does a late payment affect your cash flow, and being able to pay contractors, employees, and suppliers in time without dipping into your own pockets, it helps to keep your business flowing in a good position financially!
It can be even more devastating for a business when it comes time for BAS lodgement and they are hit with a tax bill on the revenue they have billed but haven’t received payment for themselves. (Only relevant if they are on accrual accounting for GST purposes)
For this reason, I am a huge advocate for empowering my clients to ensure they have terms spelt out for on-time payments. There are a few ways we can do this.
What is the norm when it comes to payment terms?
It’s important as a business you establish what works for you when it comes to payment terms as every business is different.
Big businesses and small businesses have different priorities and cashflow. It’s important to make sure you do not have long payment terms if this is going to cause an issue with cash flow.
As for the norm, most businesses operate on a 30-day payment term, meaning the client has 30 days to pay upon receiving the invoice. However, there are no rules and as a business, you are able to create your own payment terms, this could be direct debit, 7 days, 14 days etc.
One of the best ways to ensure you get paid the quickest way possible is discussing a direct debit system with your client (if you are charging the same every month).
What information is generally included in payment terms?
– What kind of payment methods do you accept, this can include a direct debit system, credit card, bank transfer, etc
– When can the client expect to receive an invoice? This will also help with your own planning!
– Will you be direct debiting a fixed fee?
– Be clear on how long the customer has to pay the invoice once received, do you expect it in one week or one month? Make sure this is agreed on upfront.
– Do you have any policies in regards to debt collection? How will you take action if an invoice has not been paid?
Establishing payment terms with your client prior to starting a business or taking on a new client will provide all parties with clear guidelines on what to expect when it comes to payment, and can potentially save you issues down the track.