- Getting paid on time is important for any small business owner.
- By setting reasonable payment terms with your customers, you will avoid overdue bills, poor cash flow and financial stress.
- Your understanding of common accounting payment terms and strategies can optimize your ability to receive charges on time.
- This article is for small business owners who want to use better accounting practices to receive payments on time.
When you are a small business owner, getting paid on time is a top priority. If you don't set the right payment terms with your customers, it can lead to late payments, poor cash flow and unnecessary stress to your business. ,
Luckily, you can take some easy steps to improve your billing methods. This article will look at 15 common accounting payment terms and how to use them in your business.
What are the payment terms?
When you send an invoice to your customers, the payment terms set out expectations regarding future payments. They let your customers know how you prefer to pay, and when they need to pay you.
Payment terms will sometimes also include penalties for missed or late payments. It's important to set transparent payment terms so your customers know what to expect. The more direct these are, the easier it will be for your customers to pay you on time.
What is included in the invoice payment terms?
When you send a new invoice to a customer, it should include all the information you need to make accurate and timely payments. Here is an overview of the information you should include.
- Date of invoice: This is the date you are sending the invoice.
- fixed date: The due date is when you expect to receive payment on the invoice – many invoices include standard payment terms such as Net 14 or Net 30. (You'll learn more about those terms below.)
- Invoice Number: Invoice numbers allow your customers to keep track of all the invoices you send.
- How much is the invoice: The invoice should clearly state how much the customer owes you.
- The currency you wish to pay in: If you frequently work with international clients, you will want to specify the currency in which you wish to make payments.
- Payment methods you accept: The invoice should include a list of acceptable payment methods. For example, you can accept credit cards, online payments, and ACH payments.
- Other Payment Terms: Your invoice should include any other payment terms that the customer needs to know. For example, you may want to include early payment discounts or if you expect an upfront deposit.
normal payment terms
Payment terms are usually included in the invoice as an abbreviation. Here are some of the most common invoice payment terms you need to know.
- 1MD: It shows the credit paid for the entire month's supply.
- PIA: It stands for “payment in advance”, which means that payment must be made in full before goods or services can be delivered.
- CIA: It stands for “cash in advance”, which means that full payment must be made in cash before goods or services can be delivered.
- On receipt: The payment is expected as soon as the customer receives the invoice.
- net 7: Payment is made within seven days.
- Net 21: Payment is due in 21 days.
- net 30: Payment is due in 30 days. You will also sometimes see Net 60, Net 90, etc.
- EOM: Payment is due at the end of the month in which the invoice was received.
- 15 MFi: Payment is due on the 15th of the month following the date of invoice.
- 2/10 Net 30: Payment is due in 30 days, but customer can avail 2% discount for payment within 10 days.
- cod: It stands for “cash on delivery”, which means that the goods or services must be paid for in cash at the time of delivery.
- cnd: It stands for “cash next delivery”, which means the payment must be made before the next delivery. This payment term is usually reserved for recurring deliveries.
- CBS: It stands for “cash before shipment”, which means that the balance must be paid before the product is shipped to the customer.
- CWO: It stands for “cash with order”, which means that the customer must pay the invoice in full before the goods can be produced and shipped.
- Accumulation Discount: This is a discount offered on a large order.
Importance of payment terms
The cash flow of your small business depends on how quickly your customers pay you. Having clearly defined payment terms will make it easier to predict cash flows, take on new projects and invest in new opportunities.
According to a study by US Bank, your business's cash flow could suffer if you're too lax in payment terms or don't follow up with customers who have outstanding balances – something that causes 82% of small businesses fail.
How to use Payment Terms
You can use payment terms to control how and when your customers pay you. These terms set the expectations on payment from the outset, so you avoid any confusion down the road.
Here are some tips on how to use payment terms to your advantage:
- Ask for advance payment. In some cases, you can ask for an advance payment. This can be a good option for service providers who want to guarantee payment before commencing work.
- Request a deposit. If the need for an advance payment is not genuine, consider asking for a deposit. For example, requesting a 50% deposit is a good option for larger projects.
- Create a monthly retainer. If you have clients you work with regularly, you can set up a monthly retainer for them. This is a set payment amount that you agree to every month.
- Set the terms of the invoice. If you work on and off for customers, you'll need to decide on the terms of the invoice. For example, you can set the terms of an invoice to be payable upon receipt, or you can choose payment terms up to Net 90. It all depends on what matters to you and your customer.
How to set effective payment terms
If you struggle to get your customers to pay their invoices on time, you may need to set more effective payment terms. Here are seven tips for setting better payment terms for your customers.
1. Use accounting software.
First, if you use accounting software, you can simplify your invoicing process and finances. The right accounting software will allow you to send invoices more quickly and with fewer errors.
Plus, you'll be able to track your upcoming payments, send automatic late payment reminders, and resolve your account with ease. And accounting software will ensure that your financial records stay organized and that you are prepared for tax season.
Tip: Are you interested in trying out accounting software, but overwhelmed by all the options available? Check out our Best Accounting Software guide of 2022 like our QuickBooks Online review for details on small businesses or specific products.
2. Be prepared about your payment terms in advance.
Before you start working with a new client, make sure they understand and agree to your payment terms. Explain the terms verbally to your client and include a written statement in the contract you send. This will help clear up any misunderstandings customers may have about how much you owe and when the payment is due.
3. Be polite.
Want an easy hack to get your customers to pay you faster? Be polite when you invoice your customers, and include the words “please” and “thank you” somewhere on the invoice.
A study by FreshBooks found that invoices that include “thank you” in the invoice are paid about 90% faster. And 45% of those invoices are paid in seven days or less, while 12% are paid in 14 days or less. Using “please” has a similar result; These invoices are paid up to 88% faster.
4. Offer various payment methods.
Have you ever tried to shop at a store and found that the business only accepts cash payments? Think about how you felt when you realized it – were you frustrated and annoyed by the discomfort?
That's probably how your customers feel if you offer them limited payment options. If you want them to pay on time, make it as easy as possible for them. Offer different payment methods like credit card, debit card, online payment, ACH or even cryptocurrency payment.
5. Set shorter payment terms.
One of the best ways to get your customers to pay sooner is to shorten the due date. It sounds obvious, but if you give your customers a long time to pay, they'll usually take it.
For many industries, Net 30 is considered the gold standard for payment due dates. This is a good time frame, but if you have a client who regularly ignores your Net 30 due date, you might consider shortening it to Net 21 or Net 14.
6. Be flexible.
Obviously, you want your customers to pay you on time, but you want to recognize that sometimes you're dealing with another business, and that company may struggle with cash flow issues of its own. Is. Some businesses simply cannot accommodate Net 14 or even Net 30 payment terms, and would appreciate more flexible terms.
Tip: If you have a customer who regularly makes late payments, talk to them without putting unnecessary pressure on them to find out what the holdup is. Try to come up with payment terms that work for everyone.
7. Provide discount for early payment.
Consider offering your customers early payment discounts. For example, your standard terms might be net 30, but customers receive a 2% discount if they pay the invoice within seven days.
So, if you send your customer an invoice of $5,000, they will receive a $100 discount if the invoice is paid early. These discounts tend to increase over time, so many customers can take advantage of it.
Of course, this type of discount means you'll accept less money on the invoice. But better cash flow may be worth it for your business.