Duedil Blog

As any business owner knows, a healthy cash flow is the lifeblood of a strong operation.  To ensure that your cash flow is predictable and stable, you need to make sure that you have a good system for managing payment terms.  Our previous blog on invoicing sets out a guide for properly invoicing your customers, and combining this information with establishing a good protocol for payment terms, you’ll be able to keep your cash flow under control.  There are a few guidelines that you’ll need to keep in mind, though, in order ensure the minimum amount of fuss.

 

Always discuss payment terms and confirm them in writing before placing or accepting an order. This is vital in case there are any disputes down the road – even with trusted customers.  We can’t stress this strongly enough – get it in writing every time!  The law has adequate provisions to protect victims of breach of contract, but only if you actually have a written contract in the first place. Again, your invoices should have clearly stated payment due dates. When a customer responds with terms of their own, make sure that the meaning of the language matches yours.  If there are any discrepancies that you don’t challenge, the customer’s terms will win out.  So make sure you read the two documents side-by-side, and query any differences with them before agreeing on any transaction. Allow yourself more time to pay your creditors than you allow your customers to pay you.  For example, in order to complete an order, you need to buy raw materials from a supplier, and then spend five days turning them into a completed product that can be delivered to your customer.  If your supplier needs to be paid within 30 days, then you’ll need your customer to pay you within 25 days.  If not, you’ll have to make sure you have measures in place to tide you over, whether this is cash holdings, or financing options like short term loans or overdrafts.

Regularly produce a cash flow forecast including all upcoming purchases, debt payments, and customer payments due in order to clearly illustrate your future cash flows.  If you forecast a cash shortfall in a month’s time, you can set about seeking additional business, trying to renegotiate supplier payment terms, or securing the necessary financing to keep your payments on time. Make sure you have a policy in place to prevent the payment terms from being changed after they’ve been set.  If a customer requests an additional week to make a payment to you, you’ll need to have a policy on authorising a change in payment schedule.  You’ll need to judge for yourself whether keeping their business is important enough to warrant allowing them to make late payments.  If they are always late with payments, you will have to refer back to your policies on possible penalties and interest charges.  As stated in our invoices blog, your Terms and Conditions should explain the consequences of late payment in a very clear manner.

Let us know in the comments section your thoughts and ideas on how you handle your payment terms, and whether you have any further useful tips to add to the conversation. You can also check out our previous blog post on Short on Cash For Your Business which explains alternative methods to help you bring in cash quicker.

Andrew Connolly

Andrew is a key member of the Duedil team. In addition to coordinating Duedil’s research, social media and PR efforts, Andrew also regularly blogs about useful information for startups and business owners. Duedil is the world’s largest free database of company information. Using data gathered from a variety of sources, including Companies House, Duedil presents business owners, startups, venture capitalists, and the otherwise curious with key insight into any company in the UK and Ireland.