The choice of payment terms can ensure timely payment of your invoices. You need to consider a number of factors before deciding which payment terms to use. Choosing the wrong payment terms can result in late payment, unhappy customers, and cash flow problems.
Here are some things you should consider when creating payment terms.
Cash Flow Requirements
Balance the cash flow requirements of your business with the payment terms you choose. Make sure the payment terms will yield the cash flow you need to operate. If they don’t, you may need to borrow or pay your suppliers late.
Industry and Competitive Practices
Industry and competitive practices are important to consider in determining payment terms. If you don’t use commonly accepted industry terms or meet competition, it may result in lost business or delays in payment.
The payment terms you choose should be easy to understand and clearly stated. Complex terms can result in misunderstandings, delays in payment and unhappy customers.
Everything else being equal, a good customer with an excellent payment history should be considered for more favorable payment terms if the situation requires it.
Orders and invoices that are unusually large may require special payment terms to be competitive, or the customer may request special terms. In these situations you need to balance payment terms with cash flow requirements and commercial considerations.
Discounts for Early Payment
Payment terms which include discounts for early payment can be a strong incentive for customers to pay early. Early payment reduces DSOs and increases cash flow. Select a discount that is competitive, attractive, and affordable for your company.
Late Fees or Interest Charges
Late fees and interest charges can be a stick to prod customers to pay on-time, but they can also create friction with customers and be difficult to collect. If you decide to include late fees or interest charges in your payment terms, be sure your customers are made aware of them when they are on-boarded, and clearly state them on your invoice.
Make it easy for your customers to pay you on-time. Include all payment methods in your terms including: electronic transfers, ACH, credit cards, fintech payment processors such as PayPal, and paper checks. Accepting paper checks may be inconvenient and costly to process, but if they are preferable to past due and uncollectable AR.
Creating payment terms that ensure time payment reduces DSOs, increases cash flow, improves efficiency, and enhances customer experience. AR automation provides the solutions your team needs to maximize performance and achieve KPI targets.
Accounts receivable and accounts payable cloud-based solutions with customer/vendor portals and digital processes keep vendors and customers connected whether they work remotely or not.
With a connected accounting solution for your accounts receivable and accounts payable teams to coordinate work with customers and vendors, you can go digital and enjoy the benefits of office automation.
Lockstep Collect, a leader in cloud-based connected accounting solutions, can help you boost productivity and optimize cash flow with:
- Automated Communications
- Customer Self-service
- Collections Activity Management
- Reporting & Forecasting
Lockstep is an experienced software partner that can help you increase efficiency and accelerate cash flow.
If you would like to learn more about how you can benefit from connected accounting solutions, please contact Lockstep at www.lockstep.io